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How to reduce debt in six steps

Being buried under debt makes it tough to save enough for a rainy-day fund or for retirement. Learning how to reduce debt—while saving for longer-term goals—is critical to your overall financial health.
 
It’s time to think about debt reduction when you:
  • Have debt payments (including mortgage, car loan or lease, credit card balances, and other debt) that are more than 35% of your gross income
  • Pay your monthly bills late on a regular basis
  • Can only make the minimum payment on your credit card bills
  • Reach the available credit limits on your credit cards
  • Have recently been denied credit
 

Debt reduction steps

1. Create a new budget. You may already have a budget in place, but if  your debt is increasing, now is the time to revisit it to see exactly where you’re spending more than you had planned. Your new budget should factor in long-term savings goals, like retirement.
2. Know what you owe. It helps to know exactly what you’re facing when reducing your debt. Gather all your latest credit card statements, loan papers and bank statements.
Add up the combined total to get a full understanding of how much debt you have—and when it’s due.
3. Pay more than the minimum. Paying off a high-cost debt takes a long time if you consistently pay just the minimum amount due. In addition, you could end up paying more because of accumulating interest charges.
4. Ask your credit card company for a lower rate.  If you're a good customer with a strong credit history, many companies will honor your request rather than risk losing you to the competition. If you're carrying a high balance on a card, a lower rate could save you hundreds or even thousands of dollars in interest charges over time.
5. Dip into savings temporarily. If you’re paying higher interest on your debt than you’re earning on savings, consider using at least some of your savings for debt reduction. After you pay down your debt, set a goal to have enough savings in an emergency fund to cover three to six months of living expenses.
6. Get help. Aside from support from family members or friends, consider seeking the services of a trained, certified, nonprofit credit counselor. A counselor can usually offer free or low-cost guidance on managing your money, working through financial problems and developing a personalized plan to achieve debt elimination.
 
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