America is a debt-ridden society. In America, there are over 600 million credit cards. The average American family with a credit card has nearly $16,000 in debt on those cards. The average college graduate has over $20,000 in debt, mostly from student loans. As of January 2010, the average credit card default rate is about 28%.
Alright. We all have debt, and like it or not, it is a part of life. How do we reduce our financial obligations? No one has all of the answers, but we did a little digging and came up with a few tips that we wanted to pass along.
1. Use a debt calculator: Thanks to the Internet, there are plenty of calculators available that can help you determine your debt load, calculate pay-off dates, interest rates, monthly payments, etc. Check out this page for a list of some great debt calculators.
2. Use the Snowball method: Calculate all of your debt and how much your monthly payments are. Start by using extra income (what a concept, extra income) and use it to pay off your lowest balance. Once that loan is done, take your monthly payment from that loan and use it to pay down the next lowest balance. Rinse and repeat. The biggest problem with this method is that you target your lowest balance - not your highest interest payments - so you may rack of some additional interest charges that you wouldn't have otherwise.
3. Track Your Spending: It may seem simplistic, but far too many of us don't even really know where our money goes every month. Tracking your spending is the best way to empirically determine what you do with your money - and where you can make improvements. Again, thanks to the Internet and sites like Mint.com, keeping track of your budget is a relatively easy thing to do.
4. Make Your Minimum Payments: Paying only your minimum payments is not a good long-term strategy, because it will keep you in debt (and paying heavy amounts of interest). That being said, at a bare minimum, make your minimum payments. Failure to do so is one of the biggest ways that Americans damage their credit score and rack up additional interest and penalties.
5. Debt Consolidation: Consolidating your debt into less loans can simplify your budget, lower your interest rate and your monthly payments. It will usually result in you paying more (in the long-term) because it typically extends the life of your loan, but it is a good way to free up additional cash for your monthly budget.
6. Get help: There is no shame, particularly in this economy, in taking advantage of debt counseling services. These services (often run by non-profit organizations) are designed to help the average citizen climb their way out of debt. They usually have financial planners and advisers that can help you create a blueprint to get out of financial trouble, as well as access to programs that can help rebuild your credit score.
So, what are we missing? How have you reduced your debt?