How to reduce your debt

Debt may feel like a heavy weight on your shoulders, but there are ways to potentially reduce it. Managing your debt now may pave the way to a brighter financial future

How to reduce debt

As soon as you've decided to take control of your financial situation, you may want to learn how to reduce debt. 

Keep one basic but important thought in mind as you do this: having more money going out than coming in may not be sustainable. Typically, the first step in reducing debt is to stop adding to it.  

Additionally, there are other actions you can take as part of a comprehensive strategy to lower debt.

Create a budget

It may be beneficial to create a detailed budget to track your income and expenses. By knowing how much money is coming in and going out, you may be able to identify areas where you can cut back and use that saved money to lower your debt. 

With a budget, you can:

• Record how much income you have available to spend.
• Track your monthly costs (mortgage payments, rent, credit card bills, etc.).
• Log your spending by category (e.g., childcare, groceries, transportation).

You can create your budget in a spreadsheet from scratch or find an online template somebody has already made.

Consolidate your debts

Consolidating your debt may be an effective strategy for reducing your overall debt. Here are some potential reasons why:

• Simplified repayment: When you consolidate debt, you combine multiple debt obligations into a single loan or credit account. Instead of making multiple payments to different creditors, you only have to make one monthly payment, which may streamline your finances and make it easier to reduce your debt.
• Lower interest rates: Debt consolidation offers the possibility of securing a lower interest rate on your consolidated loan or credit account than the interest rates on your existing debts. This may mean you'll pay less interest on your total debt over time, potentially reducing the overall amount you'll repay.
• Reduced monthly payments: By securing a lower interest rate or extending repayment terms, debt consolidation may reduce your monthly payments. This may free up money that you can put toward paying off the principal of your debt.
• Elimination of multiple fees: Debt consolidation may help you avoid paying fees from different creditors, such as multiple annual fees. While this won't reduce your overall debt, you may be able to save money.

Increase your income

You may want to use any extra income you bring in to help reduce your debt:

• Work overtime: If you're paid hourly, working over 40 hours per week may mean you'll earn no less than 1.5 times your regular pay rate for those extra hours. 
• Get a second job: You may be able to take on a second job for extra cash, such as a freelance gig in the evenings. 
• Rent out a bedroom: If your living situation allows it, renting out a spare bedroom can bring in some money on the side.
• Sell things you don't need: A garage sale may bring in some cash, or you can list your unwanted items on resale websites.

Free up cash

Here are some ways to potentially reduce debt by freeing up cash:

• Think about a mortgage refinance to lower your monthly mortgage payments. You may be able to put any money you save toward your debt. 
• Consider selling your current home and purchasing a less expensive one. You may be able to use any proceeds from your home sale to reduce debt that has built up.
• You may want to sell your car and purchase a less expensive one. If you have any proceeds from the sale, you could use them to reduce your debt.

Cut back on non-necessities

You may be able to save money to put toward your debt in the following ways:.

• Cook at home instead of dining out.
• Stop making impulse purchases.
• Determine your necessities and stick to a budget.
• Cut out any non-essential items, such as coffee-shop drinks and expensive clothes. 
• Find free or low-cost activities for family fun.
• Get your family engaged in money-saving efforts — for example, you can all try to reduce electricity usage in your home.
• Exercise and stay healthy to potentially avoid some healthcare costs.

Lower your interest payments

By reducing the amount of interest you pay, you may be able to put more money toward your debt:

• Consolidate your debt: As mentioned earlier, consolidating high-interest debt into one lower-interest payment may mean you'll pay less interest on your total debt over time. 
• Pay your credit card balance instead of minimum payments: If possible, pay the total balance on a credit card each month to eliminate interest accruals.
• Refinance your mortgage to a lower interest rate: Consider a mortgage refinance if it offers a lower interest rate than your current mortgage.

Make extra payments

Paying more than the required monthly payment on a credit product may lower your debt balance:

• Make a lump sum payment: If you get a bonus, money as a gift, or any unexpected extra cash, consider putting some or all of it toward your debt instead of spending it elsewhere.
• Pay a little more monthly: If you can afford it, pay extra on top of your minimum payment each month.
• Pay it all off: You may want to pay off your full debt amount with any savings you've accumulated.

Manage your money and credit

Reducing debt requires paying attention to your financial situation and creating good habits for long-term financial health. Whatever your situation, managing your money and credit may have numerous benefits:

• Take action to increase your credit score for potentially better borrowing terms in the future. A lower score may mean you'll pay higher interest rates on credit. 
• Use any freed-up funds as emergency savings, which may provide financial protection if you lose your job, receive a costly medical bill, or have other unexpected expenses.
• Add to your retirement savings to potentially increase financial security and stability.