There is never a quick-fix solution to getting out of debt. But dealing with debt doesn't have to be painful. Here are seven steps to consider when making your debt payoff plan:
1. Create a debt payoff strategy. If one of your financial goals for the year is to get a better handle on debt, put together a debt payoff strategy that complements your budget and won't overextend you financially. It's also a good idea to create a master list of all your recent holiday-related expenditures that were paid for with a credit card or a personal loan. Knowing what your total debt load is will make it much easier to create a realistic payoff strategy. And reward yourself when you hit certain milestones to keep the momentum going!
2. Pay off the most expensive debt first. Look at the interest rates of all of the credit cards you use to make purchases and sort them from highest to lowest. By paying off the balance with the highest interest first, you increase your payment on the credit card with the highest annual percentage rate while continuing to make the minimum payment on the rest of your credit cards.
3. Lower your interest rate. You can often lower your credit card interest rates by doing a balance transfer. This means moving your credit card to another bank that might lower the interest rate to get your business. Shop around and try to get the lowest interest rate for the longest duration (preferably until the debt is paid off completely). Just make sure you fight the temptation to use that new card, and commit to paying off the balance you moved over in a timely manner.
4. Use annual budget data to plan against pitfalls. Several personal finance tools allow you to see the sum of your spending for the year, which can be your greatest asset in pinpointing the areas where little changes will result in major financial progress in 2014. For example, by vowing to reduce spending in your highest-spent category by a mere 10 percent in 2014, you could put more toward emergency savings, retirement and your credit card debt.
5. Stop creating new debt. As you start to pay down your debt, stop using credit cards on a regular basis. Even if you earn cash back or other rewards with credit card purchases, stop spending with your credit cards until you have your finances under control. It's probably a good idea to leave the cards at home when you're out shopping so you aren't tempted!
6. Allocate your holiday bonus. If you received a holiday or New Year's bonus, put that money toward your debt payoff plan. Avoid the temptation to spend that bonus on a vacation or other luxury purchases at the beginning of the new year, so you can focus on improving your financial health instead.
7. Pay more than the minimum. Break the habit of paying only the minimum required each month on your credit card statement. Paying the minimum – usually 2 to 3 percent of the outstanding balance – only prolongs a debt payoff strategy. Strengthen your commitment to pay everything off by making weekly, instead of monthly, payments. If your minimum payment is $100, double that to $200 or more. Early and/or multiple payments mean reduced interest expenses and a quicker pay down, which will help you get back on a positive financial track.
Like anything having to do with self-betterment, the road to being debt-free can be a difficult and arduous one. But following these basic steps as your guide can help get you on the right track.
Hitha Prabhakar is a consumer spending and retail analyst and mint.com spokeswoman, the leading web and mobile money management tool that helps people understand and do more with their money.