10 Tips to Reducing Debt in 2011

NEW YORK (LowCards.com) -- Paying down debt is one of the most common New Year's resolutions, and the tough economic times of the past few years have just provided further motivation. While being motivated is a good start, though, to be successful you must also have a plan.

Here are 10 tips to help consumers to reduce personal debt in the new year:

If you need to pay down debt but have multiple credit cards with outstanding balances, focus first on paying off the card with the highest interest rate.

1. Know how much you owe. Collect each of your bills with outstanding debts, including from all credit cards, mortgages and student, auto, personal and bank loans. Create a list of all the creditors with monthly payment amount, balance, interest rate and credit limit for each. Verify the payment due dates and the status of the account.

2. Prioritize which bills to pay first. If you can't pay off all of your monthly bills, first pay the bills that are a necessity for health, shelter, basic groceries and basic transportation. Then pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last in these critical situations.

3. Get a free copy of your credit report and review it. It may contain an error that is creating a lower credit score and leading to higher interest rates on your loans. If correcting the error results in a higher credit score, contact your creditors to make sure they know about your improved score.

4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be willing to work out a payment plan, lower your rate or lower your monthly payment. Explain that you are in debt, the steps you are taking to repay it and what you can pay today. If you request a lower interest rate and get turned down, politely ask to speak to a supervisor and ask again. Document all conversations, including with whom you spoke and the date, time and results.

5. Pay more than your minimum payment. Your minimum payment is usually only 2% to 5% of your balance. At this rate, it will take many years to pay off your debt. In fact, your credit card bill now shows exactly how long it will take. You may be surprised by how much you will pay in interest payments by paying just the minimum each month.

6. If you have multiple credit cards with outstanding balances, focus first on paying off the card with the highest interest rate. Continue to pay the minimum on your other cards until the card with the highest rate is paid off, then focus your effort on the card with the next highest interest rate. Keep your oldest credit card accounts open and occasionally use them to buy a magazine or a movie ticket -- just pay it off each month. This may help improve your credit score.

7. Check into transferring your balance to a card with a lower interest rate. If your rate is above 15%, it could pay to transfer the balance for that card to one that offers 0% APR for at least 12 months for balance transfers. Citi Platinum Select ( C) offers a 0% rate for up to 24 months. To take full advantage of this 0% interest, pay as much as you can above the monthly minimum. Only use this card for the balance transfer, not additional purchases. Pay attention to the balance transfer fee. At the beginning of last year, the industry standard for a balance transfer fee was 3%; now several issuers have increased that to 4%.

8. If you have a balance on a credit card, stop using it for anything other than necessities. If you use cash, you will not only save money on interest, but reduce the amount you spend. According to studies, shoppers spend 12% to 18% less when using cash. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone.

9. Pay your bills on time, every month. Late payments can drag down your credit score. If you are 30 days late on your credit card payment, you could lose 60 to 110 points depending on your credit score. The higher your credit score, the more points you may lose.

10. Take advantage of help provided by your bank and credit card issuer. Sign up for online payment alerts that notify you when a payment is due. Most banks offer this service for free. It can also notify you when your account has dropped below a designated balance. Some cards such as Citi MasterCard ( MA) provide a system called inControl that gives cardholders the ability to set spending limits and get real-time information about their account. It can help set up budgets for particular types of spending and manage exactly where, when, how and for what types of purchases their credit cards may be used.

Paying down debt will take time, but there are many benefits. As you pay down your balances with on-time payments, your debt will decrease and your credit score increase. As your score increases, contact your issuers to ask for lower rates.

-- Reported by Bill Hardekopf of LowCards.com.

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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