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Seven Steps to Downsize Your Debt

February 2019

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Is leftover 2018 holiday debt still hanging over your head like a big dark cloud? Take a deep breath and relax. There are a number of time-tested ways to dig out of debt and free up money to save. Each small step toward being debt-free will decrease financial stress and provide increased peace of mind.

Below are seven time-tested debt repayment steps to consider:

  • Know What You Owe- Make a list of outstanding consumer debts that need to repaid. This includes various types of loans and credit cards. Include the names of creditors, balances owed, the number of monthly payments remaining (if known), and the dollar amount of monthly payments. Identifying how much you owe and who you owe it to is the first step to getting out of debt.
  • Decide What You Can Repay- Ideally, you'll want to pay at least double the required monthly payment. This would be 6% of the outstanding monthly balance instead of the typical 3% required minimum payment. This one simple step can save hundreds, even thousands, of dollars of interest and years of debt repayment. Online credit calculators and the debt payoff table in your credit card statement are useful tools to estimate how long it will take, and how much interest it will cost, to repay existing creditors.
  • Increase Income and/or Reduce Expenses- Track current living expenses for a month or two and identify spending “leaks.” Plug the leaks through reduced spending and earmark the newly “found” money to repay debt. A second option is to increase income via a second job, working overtime, or freelancing “side hustles.” An occasional way to raise income is through the sale of possessions online or at garage sales.
  • PowerPay Your Debt- PowerPay is a free online Cooperative Extension program that works by adding the amount of monthly payments from paid off debts to monthly payments for existing debts. As each creditor is repaid, remaining creditors receive larger payments with freed up cash, resulting in both time and interest savings. To generate a PowerPay calculation, prepare a list of creditors and the outstanding balance, monthly payment, and interest rate for each debt.
  • Consider Refinancing- Refinance existing debt (e.g., balances on credit cards) if current interest rates are lower than the rate you were previously paying and you have the willpower to not run up credit card balances again. Before you refinance, however, check the required fees to make sure that the interest savings is not offset by closing costs, application fees, and other expenses.
  • Borrow Cheaper Money- Consider transferring high-interest credit card debt to lower-interest loans and credit cards. Other relatively inexpensive borrowing options are cash-value life insurance policies, family loans, and credit union loans. Avoid high-cost borrowing from payday lenders and car-title loans.
  • Get Help When Needed- Contact a non-profit credit counseling agency for help getting out of debt. Credit counselors can provide budget counseling and often negotiate with a debtor's creditors to receive concessions such as waived fees and lower interest rates. If you enroll in an agency's debt management program, you will probably need to surrender your credit cards while outstanding balances are being repaid.