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Five Steps to Manage Your Debt

Manage Your Debt with 5 Easy Steps

If you feel like it’s getting more and more difficult to pay off your bills every month, it may be time to reevaluate your finances. Your credit rating can affect everything from job prospects to your ability to buy a home, so it’s never too soon to take control of your debt.

To better manage your debt, consider these five steps:

1. Track your spending. Record every penny you spend in a daily journal for a month or two. We admit that’s not the most exciting activity, but trust us, you will be amazed at the results. Jot down coffee and sodas on the run, daily breakfast, lunch and snacks, grocery store runs, and other places you spend but don’t ordinarily keep track of or budget for. Most households can typically find at least 15% that can be cut from their spending without pain.

TIP: Use a small notebook or a piece of paper in your wallet and log ALL daily expenditures everyday.

2. Develop a Debt Plan. Sometimes debt can be overwhelming and instead of tackling it head on, we try to avoid it. This generally makes matters worse. In reality, having a clear plan is one of the first steps to controlling debt. Start by writing down all your debts. Rank them by interest rate, with the higher ones on top. Make the minimum monthly payments on all your debts except the one at the top of your list — give it priority. Use all extra cash to pay down the debt with the highest interest rate, first. Review your spending plan: How much flexible spending money do you have? What can be allotted to your debt pay-off strategy? Use any raises, bonuses or moonlighting income to further reduce the top debt.

TIP: Set goals for paying down debts. The more specific your goals are, the more likely you’ll reach them.

3. Consider consolidating debt through a home equity loan. Interest rates are typically quite reasonable, and the interest on the loans is tax-deductible, up to certain limits. Be careful: you are using your home as collateral, so make sure you borrow wisely. You certainly don’t want to put your home at risk by falling behind in payments.

4. Roll your debt into a lower rate credit card. Interest rates can greatly affect your monthly payments and the overall cost of your credit. By keeping your debt consolidated on one or two cards with low interest rates, you can save as you work to reduce your debt. Check out top credit card deals.

5. Set up a budget. Ideally, that 15% you "find" can help you begin to pay down your debt. If you still need to find some more fat to trim , it’s time to put yourself on a spending diet, otherwise known as a budget. Budgeting isn’t the most exciting thing to do, but tracking your expenses is the key to learning where you can trim.

If it’s already too late for any of the aforementioned steps and you are drowning in debt, there’s still plenty to do.

Contact creditors. Don’t stick you head in the ground if you fall behind on payments. That’s not going to solve anything. It is far better to take action: call credit card companies and other lenders before they call out the collection agency. Many of your lenders will appreciate your taking responsibility for your situation, and will work with you to devise a payment plan that you can handle.

Get credit counseling. If you are having trouble tackling your debt problems alone, there’s low-cost, and often free help available from the non-profit Consumer Credit Counseling Service. Counselors will help you negotiate with creditors and devise a payment plan.

File for bankruptcy. Use this only in dire last-resort situations. Though bankruptcy may seem like a fresh start, it’s important to remember that your credit rating will remain tarnished for seven to ten years. And that is going to affect your ability to obtain a credit card, buy a house, lease a car. In some instances, it might even affect your ability to get a job.

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