Debt is something most folks tackle at some point. In fact, consumer debt rose to nearly $15 trillion in 2020. That’s why using credit wisely is so vital, and the goal of today’s article is to provide a short guide to help you better manage debt.  

Understanding what kind of debt you have is equally important as knowing how much debt you’re in. According to a 2020 Experian report, mortgages, student loans, and auto loans were the highest contributors to the U.S. debt total. Credit cards, retail cards, and home equity lines of credit (HELOCs) also contributed significantly to the overall sum.

Various types of debt carry different fees, interest rates, terms, and credit score impacts. Take stock of your situation by listing your current debt, the remaining term, and the interest rate.

How to reduce your debt

Make Payments to the Principal

Your loan principal is the amount you borrowed, and the interest is the percentage rate you paid to borrow that money. Since the interest accumulates based on the overall amount owed, the more you allocate toward the principal, the less overall interest you’ll pay and the faster you’ll pay off your loan in the long run.

Refinance Existing Debt

Refinancing existing debt is another option that may lighten your load. Depending on the current rates your lender’s offering, this process may lower your rate and payment, and shorten your loan term. In essence, a refinance is a new loan that takes on your prior loan balance. As such, refinances will typically require another credit application and approval, so do your research to understand what qualifications your lender requires ahead of time and consider shopping around to find the best rates and terms.    

Consider Consolidation

Consolidation may be an option if you have numerous loans. Consolidation works by combining the balances owed on multiple loans into one single loan with one payment and one fixed interest rate. For example, a university student juggling several loans post-graduation may opt to combine loans into a single payment via the government’s Direct Consolidation Loan. Depending on your current situation, consolidation may result in a lower interest rate and shorter loan term. Also, you will have fewer payments to keep track of, making it a potentially easier lift. As with any loan, it’s important to research the potential lenders, to make sure you are working with a reputable institution.

Additional Options for Debt Reduction

Debt reduction doesn’t have to mean altering your existing loans. Healthy financial habits can make a significant dent.

Set It and Forget it

Setting up auto-pay is one of the simplest ways to reduce debt. Automatic payments prevent missed payments and unnecessary late fees, ensuring you are consistently chipping away at your debt.

Look for Lost Money

Forgotten and unused recurring expenses could be draining your wallet. A 2021 survey discovered that 51 percent of respondents had unused subscriptions and experienced unwanted charges. This is the last thing you need if you’re looking to pay down debt. Review your monthly bills to pinpoint unwanted and unused memberships and fees for services you don’t need. Reallocate those funds to paying down debt instead.

Practice Discipline

Developing healthy spending habits can help you save more and, in turn, pay down your existing debt faster. And it doesn’t take much. For instance, spending $30 less on dining out each week will net you over $1,500 at the end of the year. Small changes can help in a big way over time. Sure, it won’t always be easy, but financial freedom is worth the small sacrifices.

Stay Positive, Be Consistent

Debt reduction is a marathon, not a sprint. Take it one day at a time and remember to celebrate wins along the way. With a positive mindset and our simple strategies, you could be on your way to less debt in no time.

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