To get rid of large (five- or six-figure) consumer debt in any reasonable time takes sacrifice to make those extra payments. Extra payments will speed the debt reduction process along, regardless of where the payments are made, because extra payments mean less interest gets charged to those accounts.

But, the $64,000 question is: Which debt should be paid off first? (If the debts are large enough, it could be a $64,000 question!)

There are pros to slaying a dragon quickly by paying off the lowest balance first.  But there are also pros to taking the longer road, which is to pay off the highest interest rate first. Taking this route means (possibly) that getting rid of the first debt will take longer (if the highest-rate debt is not also the one with the smallest balance) but it means that the interest savings will be the highest.  Paying down an 18% debt over paying down a 9% debt results in twice the accumulated interest savings.  It gets everything to zero with the least financial pain.

But again, in the grand scheme, it doesn’t matter which debt gets paid off first.  The important thing is that they all get paid off eventually.

But, given the option of throwing extra money at one of your debts, which one should you choose to tackle first?  Fortunately, it ultimately doesn’t matter a whole lot, but one good choice is pay off the debt with the lowest balance first. Given a $5,500 car loan, a $10,000 student loan, and a $1,500 credit card balance, a decent choice would be the $1,500 credit card balance, regardless of which debt had the highest interest rate.

Why pay off the lowest balance first, even if there are other higher-interest-rate debts?

Hitting the highest interest rate first would save more money in interest, but that’s not the primary motivation for paying off the smallest debt first.  The main reason to knock out the little debt is purely a matter of psychology.  Killing a debt is a great accomplishment. Killing a small debt is still killing a debt, right?  That’s it.  And once that little debt is out of the way, what was being paid on that debt can be applied to the next debt.  Because this debt was the smallest one, this turbo boost happens sooner rather than later.

Regardless of which debt you decide to pay down first, the point is to choose one, and hit it hard!

Often, you take many credit cards in order to maintain a certain standard of living. But the problem arises when you can’t repay of the loans. The creditors start calling you time and again. Your credit score gets reduced. Therefore, it is extremely important that you should try to reduce credit card debt as soon as possible.

How can you reduce credit card debt? Here are three ways to accomplish this:

• Self help. You should make a list of all of your credit cards in a descending order (highest balance to the smallest balance). Then add all the minimum payments that you have to make on credit cards. You should calculate your monthly income and expenses so that you can figure out how much you can afford to pay each month. Make a budget and cut down your luxury expenses. You can negotiate with your creditors in order to reduce the interest rate. You should stop using credit cards and should instead pay in cash whenever you are purchasing something.

You should make at least the minimum monthly payments on the credit cards. If possible, double or triple your payments on the highest-interest card until it is eliminated. Then repeat this process with other cards one-by-one. You can transfer the balance to low rate card. You can liquidate certain savings accounts in the banks also. This will help you to reduce credit card debt easily.

• Debt settlement.  Under this program you have to stop making payments to the creditors. You have to save the money in the trust account opened by the debt settlement company. When you have saved a considerable amount of money in the trust account, then the debt counselors will negotiate lump-sum settlement with the credit card company.
• Debt consolidation.  In this case the debt consolidation company will give you a big loan so that you can eliminate other smaller debts. In return, you have to make a monthly payment. Usually, the monthly payment is less as the interest rate is low. This helps the individual to save money for emergency purposes.

You can easily reduce credit card debt if you follow these steps carefully. However, one should remember that it takes time to reduce debt.

Recently we’ve had a lot of expenses crop up, some planned for, others not.  We’re a little strained at the moment.  But we both realize that we need to buckle down, and we’re cooperating on this. We don’t have a huge amount of debt, but the principle would be the same if we did.  It’s difficult to make strides in debt reduction when only one partner is working at it.  It’s possible, but the job will get done a lot faster if both are working at it together.

So, make sure you and your spouse are on the same page as you reduce your debt.

One quiet night when I was walking back from the lab there was a very heavy snowfall.  Since it wasn’t that cold, the snow was a little bit wet, which means that when it fell it stuck together.  It was a beautiful snowfall, so I stood outside for a while and listened.

Once in a while I could hear a branch on a tree snap a little bit.  Once or twice I heard a branch break off and fall to the ground.  The weight of the snow was enough to break tree branches.

But it was so quiet.  And although one snowflake couldn’t do the job, billions of them could.

That’s a really good analogy for debt snowflaking, a term coined by I’ve Paid Twice For This Already.  (It’s an extension of Dave “Total Money Makeover” Ramsey’s “debt snowball” concept.)  Basically, you use lots of little contributions here and there to make your big financial goals, like paying off all of your debts.

And just like the snowflakes were able to bring the tree branches down, lots and lots of little extra payments can bring your debt crashing to the ground.  One week it could be the money you save brewing your coffee instead of buying it by the cup.  Or another week you could try generic brands instead of name brands

It all counts, and it all adds up.  One week’s worth of scrimping won’t do it, but week after week, for however long it takes, will.

(Photo: CaptPiper)

It’s no secret that banks are bleeding and buckling under the weight of huge losses.  So, if you were savvy enough to play the balance transfer game with your cards and keep those payments low, the rules on some cards may have changed to make that a lot more expensive, and a lot less enjoyable.

What’s more, these practices are probably within the scope of the terms of use for the card!  I did a quick pull of a credit card user agreement, and it very clearly stated that the issuer could change any terms of the agreement at any time, including (but not limited to!) APR, fees, Default Rate, repayment date, or statement date.  Basically, unless you cancel the card, you’re stuck with the new terms.

So, expect the rules to change, and be prepared!

(Photo: szlea)

“What will it be like to be debt free?”

You may be experiencing pain from being in debt, from not having enough paycheck for your month, from watching time slip away with unfulfiled dreams.  Getting out of debt to avoid this pain may work, but also remember to look forward to the things you can do when you’re not saddled with so much debt.

If you can’t possibly imagine what good things can come out of being debt free, check out No Credit Needed’s post on twenty things that rock about being debt free.  These are happy thoughts from someone who’s gotten out of a fair bit of debt himself.  The light at the end of the tunnel is nice and bright.

Say you have a debt reduction plan.  Say you have something like No Credit Needed’s Debt Reduction Guide and are following it through.  Say you’re doing really well with it, you can keep track of things, your debt is going down, and things are getting a little more comfortable.

Say also that you get advertisements in the mail for 0% balance transfers.

Why not take one of your cards with a non-zero APR and transfer it to one that has 0% APR for a while?

Well, it can help, for sure,

• if you can maintain the payments on all of your cards, especially the 0% one
• if you can keep track of when the 0% period runs out and make adjustments to pay that one off quickly when the rate goes up
• if you read all of the fine print on the offer and understand it
• if you understand all of the fees that might be attached to the balance transfer
• if you don’t use it as license to spend more or slack off

It’s probably not a good idea if you are bad with details or if you have so little breathing room that you’re likely to miss a payment.  The default APR on these cards can be quite high … and your other cards’ APRs might go up as well.

So, use 0% balance transfers with care as you reduce your debt.

(Photo: Gaetan Lee)

It’s no better time than the present to make a plan right now, but since this particular right now coincides with the new year, it’s an especially good right now.

What is the one specific action that you could start right now that would help you reduce your debt? It doesn’t really have to be big; in fact, the simpler, the better.  Maybe you’ll pack your lunch one more time a week, and add $10 per month to your credit card payment.  Something manageable, something easy, and something that you can stick with.

It doesn’t have to be the last thing you do toward your debt reduction.  Hopefully it won’t be.  But a plan to do something very easy will lead to plans to do other things that will build upon one another.

So if throwing extra money at your debt is good, throwing more extra money is better, right?  Yes, but up to a point.  If you throw every last spare dime you have at your debt, it drains your bank account, and you’re left with no cash if the car breaks down, if you have a debilitating toothache, if your roof springs a leak, etc.  You have no emergency fund, and out come the credit card again, with an increase in your balance soon following.

The moral:  Build up an emergency fund so that if you need to shell out $500 or $1,000 for an unexpected expense, you have it to spend.  Building this up will slow your debt reduction, but the peace of mind is worth it.