How to reduce your debt payments

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The average American owes about $29,800 in debt outside of mortgages while the median household income hovers around $63,000. That means a typical family would have to use almost half of their pre-tax income to pay off their debt in full within one year. For most people, that’s unrealistic and reveals the need for a comprehensive debt reduction plan to truly tackle these financial issues.

Instead of skirting around your high balances, use one or more of these five strategies on how to reduce debt.

What is debt reduction?

Creating a debt reduction plan allows you to proactively pay down your debt, usually at a more accelerated pace than you initially planned. Credit cards, for example, are a type of revolving credit — meaning you don’t have a fixed payoff date. Making the minimum payment month after month doesn’t necessarily mean you’re paying enough. A credit card’s interest rate can cause the balance to snowball into hitting the credit limit, leaving you with no access to cash and a high credit utilization ratio.

Even loan payments can eat up your budget each month, preventing you from accomplishing other goals with your money. Reduce debt and you free up your money in a way that allows you to think beyond monthly due dates.

5 ways to reduce your debt payments

1. Negotiate with creditors

When you fall behind on your debt payments or struggle to make the payments each month, you may be able to negotiate an alternative payment plan with your creditors. If you’re wondering how to lower loan payments, one option is to refinance to a lower rate. You could also lengthen your loan term, which costs more in the long run but could also make your monthly payments more manageable.

Wondering how to reduce debt payments for your credit card? As long as you’ve made payments on time for the last several months, you may be able to negotiate a lower interest rate, resulting in lower debt payments each month.

2. Consolidate your outstanding debt

Another tactic to reduce your debt ahead of schedule is consolidating various balances into one single loan. One option for doing so is taking out a debt consolidation loan. Depending on your credit score, you could qualify for a much lower interest rate compared to your credit card. Plus, you’ll get on a fixed payment schedule and roll all of your different bills under a single due date.

Another strategy for homeowners is to take out a home equity loan to pay off high-interest debt. You need to have equity in your house but your loan terms are likely to be more favorable. The downside to qualifying for lower rates, however, is that your home is used as collateral for this second mortgage.

3. Transfer balances

This option works for credit card debt, especially if you’re subject to high variable interest rates. Many credit card companies offer balance transfer promotions, giving you a temporary low interest rate or 0% APR for a year when you transfer existing balances to the new card.

There are a few things to look out for, though. Oftentimes, you’re charged a fee for the transfer process, so make sure the price tag is worth the benefits. Additionally, if you miss making a payment on time during the introductory period, you could automatically lose that promotional low rate.

4. Credit counseling

Sometimes it’s difficult to create a realistic debt reduction plan all by yourself. In case you need professional help, consider working with a non-profit credit counseling service. They’re typically either free or very affordable, but figure out the pricing and services before you get started. A credit counselor can help map out your financial options, create a budget or make a debt management plan. Once this plan is made, be sure to stick to it, or it will not work.

5. Bankruptcy

Filing for bankruptcy is serious business and should be reserved as a last resort for those who are facing a mountain of debt that is too much to pay off. There are two types of bankruptcy that a consumer can file. Chapter 7 requires a means test to qualify and sells off your personal assets to settle your debts. It stays on your credit report for 10 years.

Chapter 13 bankruptcy, on the other hand, places you on a payment plan to your creditors for five years, after which point your debts are considered settled. It’s listed on your credit report for seven years.

The bottom line

Debt reduction is a process that takes time and effort. Luckily, you have multiple avenues to explore in order to create a successful plan that works for you. Once you get started, you’re likely to notice a change not only in your finances, but in your daily quality of life as well.

Written by
Lauren Ward
Insurance Contributor
Lauren Ward has nearly 10 years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, and She covers auto, homeowners, and life insurance, as well other topics in the personal finance industry.