Decrease Your Debt

 

 red purse with credit cards and a measuring tape around it

By Mary Hunt

It's the new year, which means it's time to take a deep breath and pay down your credit cards and other debt. Once you get started, you'll be happy you did. Photo by: Jenny Bowers

Prioritize credit card bills

The interest rate is what matters most when you're digging out of credit debt because that's what costs you more money in the long run. Pay off the highest-interest-rate card first, regardless of the balance, while also paying the minimum on your other cards, says Liz Weston, author of The 10 Commandments of Money. Once the highest-rate card is paid off, apply the same amount you'd been paying on it to the next-highest-rate card, and so on.

Give your cards a break

Tempting as it may be to keep charging, don't-not even for inexpensive stuff. "Charges add up faster than you realize, so leave the credit cards at home," says financial planner Harrine Freeman, author of How to Get Out of Debt. "Pay in cash only until you wipe out the debt." But don't cancel your cards, even if you have several. "Closing them lowers your available credit, which could negatively affect your credit score," says Weston.

Refinance your car loan

Don't waste time asking your lender for a better interest rate. Odds are they won't knock it down. Your best bet? Look into refinancing, especially if rates have dropped since you bought the car and your FICO score has gone up. "If your credit standing is better now, it will help you get a much lower rate, perhaps even low single digits," says Greg McBride, CFA, senior financial analyst at Bankrate.com.

Follow the 1/12 rule

Here's how to pay off your mortgage faster: Each month, when you make your regular mortgage payment, add an extra 1/12 of that amount and designate it as "Principal Only." At the end of one year, you'll have made 13 monthly payments. This cuts five years and two months from a $160,000 30-year 5.5% fixed-rate mortgage, saving you $33,102.85 in interest! (First, check that your lender accepts principal prepayments.)

Find a debt buddy

"Each week, check in with a friend who is also trying to get her financial house in order," says financial coach Glinda Bridgforth, author of Girl, Get Your Credit Straight! "It's a great way to get advice and encouragement."

Consolidate!

Save money paying interest on your debt by transferring all your credit card balances to one 0% APR introductory card. But keep in mind that you'll have to pay off the balance in full before the intro period ends, or else you'll be hit with a high interest rate.