- You don’t know how much you owe.
- You’re not paying off your statements in full each month.
- You’re suffering psychologically from it (e.g., losing sleep, avoiding emails/phone calls from bank).
What is debt reduction?Debt reduction is taking proactive measures to cut down the money you owe to creditors. This includes things like:
- Credit cards
- Student loans
- Car loans
- Utility bills
- You’ll be in debt longer. Even the scammiest consolidation services will be able to give you a lower interest rate on your loan. However, they often protract your loan term (the length of your loan), meaning it will take you longer to reduce debt and you’ll end up paying more even with lower interest rates.
- You might lose a BIG asset. If you put your car or home down as collateral and fail to make payments, your debtors are within their rights to repossess those assets. Losing a car could mean your livelihood is at stake if you commute to work. And having a house taken away from you could mean homelessness.
- Your credit score will drop. 15% of your credit score is how long you’ve held onto a line of credit for. That means if you pay off a bunch of credit and take on a single big loan, you’re going to see a drop in your score. That drop only gets bigger with the more lines of credit you close.
How to find a good debt reduction serviceIf you want to find a good debt reduction service, look for a non-profit. These are 501(c)(3) organizations that help provide debt relief through things like:
- Credit/debt counseling
- Negotiating lower interest rates or total payment with your creditors
- Fees. Yes, you read that right. Reputable non-profit debt reduction services will charge you a fee. These are typically monthly maintenance fees that are relatively low cost. Note: A good non-profit will work with you if you cannot afford it. Some will even waive the fees entirely for you.
- Non-profit status. “Well, no duh,” you’re probably saying. But the reality is a lot of scammers pretend they’re non-profit in order to take advantage of people’s goodwill.
How to reduce debt IWT style
Step 1: Discover exactly how much you oweA lot of people in debt don’t actually know how much they owe. It all boils down to human nature. Debt is a bad thing. Society looks down on people who owe exorbitant amounts of money. So people end up feeling guilty about their debt. So what do we do? One of two things:
- Blindly pay the minimum amount toward bills with no strategy.
- Not pay at all because we’re paralyzed by our debt.
|DEBT||TOTAL OWED||APR||MONTHLY MINIMUM PAYMENT|
|Credit card A||$X||X%||$X|
|Credit card B||$X||X%||$X|
Step 2: Decide what to pay firstNow you need to ask yourself: Which debt should I pay off first? And there are a lot of different ideas on how this should be approached. The standard method involves paying the minimum on all debt, but pay more money to the loan with the highest APR because it’s costing you the most. Dave Ramsey famously touts his Snowball Method of getting out of debt. This involves paying the minimums on all of your debt, but paying more money to the card with the lowest balance first (i.e., the one that will allow you to pay it off the quickest). This is a source of fierce debate in debt reduction circles. Technically, this method isn’t the most efficient way to approach your debt since the debt with the lowest balance doesn’t necessarily have the highest APR. Psychologically, it’s very rewarding to see one debt paid off. That’s why it’s the one I suggest.
Step 3: Negotiate your APR to save thousandsI’m a huge fan of taking 50/50 odds if the upside is big and it only takes five minutes of my time. That’s why I love negotiating my interest rates. The best part is it works surprisingly often — and if it doesn’t, so what? Especially considering you can save more than $1,000 with a single phone call. Remember: Negotiations are all about being polite yet firm. Remind them that you’re a loyal customer and appreciate their service — but you’d really like to have your interest rates lowered to help you reduce debt. ACTION STEP: Use this script to lower your APR. Here’s a word-for-word script that many of my readers have used already to lower their interest rates:
YOU: “Hi, I’m going to be paying off my credit card debt more aggressively beginning next week, and I’d like to lower my credit card’s interest rate.”
CC REP: “Uh, why?”
YOU: “I’ve decided to be more aggressive about paying off my debt, and that’s why I’d like to lower the interest rate I’m paying. Other cards are offering me rates at half what you’re offering. Can you lower my rate by 50% or only 40%?”
CC REP: “Hmmm … after reviewing your account, I’m afraid we can’t offer you a lower interest rate.”
YOU: “As I mentioned before, other credit cards are offering me zero percent introductory rates for 12 months, as well as APRs that are half what you’re offering. I’ve been a customer for XX years and I’d prefer not to switch my balance over to a lower-interest card. Can you match the other credit card rates, or can you at least go any lower?”
CC REP: “I see … hmm, let me pull something up here. Fortunately, the system is suddenly letting me offer you a reduced APR. That is effective immediately.”Repeat this process for any other cards you can, and then move on to my favorite step.
Step 4: Find the money to pay off your debtOne common barrier to paying off debt is wondering where the money should come from. Balance transfers? Using money from your 401k or savings? These questions are daunting — which is why I want to address two bad options now and give you some good ones:
- Balance transfer. Many people begin by considering a balance transfer to a card wit a lower APR. I’m not a fan of this. Why? Simple: It’s a Band-Aid for a larger problem (typically your spending behavior). Plus the process is very confusing, rife with tricks pulled by credit card companies to trap you into paying more. A better option would just be to negotiate down your APR.
- Using money from your 401k. This is also not a viable solution. Not only do you put your financial future in serious jeopardy by borrowing against your 401k, you’re setting yourself for a bad habit of dipping into these accounts whenever you fall into debt. Plus you’ll be heavily penalized if you withdraw from your 401k before retirement age — losing even MORE money. I repeat, do not use money from your 401k.
- Use the cash you’ve freed up from Step 3. You’re paying less in interest now and should use that money towards taking down your debt.
- Set up a Conscious Spending Plan. This is an automated system that lets you know exactly how much you have to spend each month — while also paying off your debt automatically. More on that here.
- Tap into Hidden Income. Through more negotiations, you’ll be able to save hundreds per year on things like cable, cell phone, utilities, car insurance, and even rent. More on that here.
- Earn more money. This is my favorite way of getting out of debt. You can only save so much money — but there’s no limit to how much you can earn. More on that here.
Wipe out your debt — and live a Rich LifeBeating debt isn’t easy — but through a few straightforward systems, you’ll be able to take control of your debt for good and build habits that’ll lead to financial success. Do me a favor: Write in the comments below one thing you’re going to do TODAY to help get you out of debt. I’d love to hear from you.
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