# Seven Steps to Debt Reduction

“The person who is debt free is a master of his own fate, not the servant of anothers”

– Michael Moore

Here are seven steps to debt reduction which anyone can use to help reduce the amount of debt they have.

These steps can be applied whether you have a mountain of debt or just a couple of small ones. The basic principles of what to do remain the same. Before you start on your debt repayment campaign, you need to ensure there are sufficient funds to cover your basic expenses. Then what is left over can be used for the repayment of debts.

e.g. Your mortgage or rent, utilities such as electric water rates and so forth, food, travel expenses etc. Such things as insurance can often be suspended for a period, check with your financial advisor at all times before and during following these steps. The balance can be put towards paying off your debts using the following debt reduction checklist.

**The Seven Steps to Debt Reduction**

1. The first step is to know what debts you have. This means listing them all including such information as:

a. To whom the debt is owed

b. The total amount owed

c. How much is due each month or payment period

d. How long the debt is for

e. What the interest rate is.

2. The second step is to make a payment list. On this will be the debt listed in order of priority as regards payment. The list should have, again, the name of the creditor, the total amount, the monthly repayment and the interest rate.

3. The third step is to prioritize the debts in the following order a. At the top are those debts that MUST be paid each month

b. Next is those debts that have the highest interest rate. This is commonly credit cards and hire purchase. The one with the highest interest rate goes on top. If there are two or more with the same interest rate the smallest goes on top and the larger one is second on the payment list.

4. One pays these debts, then, on the basis of, the highest interest rate gets paid first. The idea is to reduce the total amount owed and reduce the amount that must be paid out at the same time.

e.g. If you have 3 debts of 5000 dollars each, one has a 20 percent interest rate, one a 17 percent interest rate and one a 12 percent interest rate, the focus will be to pay off the one with the 20 percent interest rate first or as much as possible FIRST. This will reduce the overall amount owed and also the overall amount that must be paid each month. One does this by paying the minimum allowed on each debt except the one with the highest interest rate. One pays as much as one can on THAT ONE.

5. So in this example the two debts with the 17 and 12 percent interest rates gets the bare minimum payment each month and the one with the 20 percent interest rate gets the lions share. Paying over the minimum will reduce the debt with the larger interest rate much faster. Where you have two or more with the same interest rate, make the smaller one the top priority to pay off. This will relieve the pressure of the number of debts one has.

Example. Three debts all with an interest rate of 17 percent. One is 10,000, one is 5000 and one is 2,500. Pay off, with extra payments, the 2,500 debt first followed by the 5,000 and eventually the 10,000. Always remember to pay the minimum required each month or payment period on the remaining debts.

6. When this is completed the next debt is then the top debt and that can be paid off the same way. One goes through the list this way until all debt are paid off.

7. A very important part of reducing debt is to not incur more debt. The article on discipline may be of some help here. Additional actions such as cutting up your credit cards, using a debt manager or financial advisor to handle ones finances and receiving from your income only a small amount for your day to day activities is another way if you feel you are unable to handle this yourself. Whatever you do it is important that you do everything in your power to not incur further debt otherwise all your efforts will be wasted.

**Some Extra Tips on Reducing Debt**

Sometimes you can negotiate to suspend payment of a debt for a period. This should be applied to the debts with the LEAST amount of interest then freeing up funds to add towards paying off the debt with the MOST interest..

In addition it is often possible, especially with credit cards, to get the interest rate reduced. One simply rings up the credit card company and states that one can get a better interest rate with another card and that card company has asked you to transfer your debt to them, and ask will they be willing to reduce the interest rate to keep your business? They may ask you who the other creditor is so you will need to be able to substantiate the facts. Very often they will reduce the interest rate to keep your business because, after all, debt is big business and profit is made from debt. Having done that one can reduced the interest rate on credit cards very effectively this way.

Remember, no two persons financial situation is the same and in all cases always refer to your financial advisor before embarking on any debt reduction system or using any debt reduction company.

I hope the above seven steps to debt reduction help one to be able to lead a debt free life.