How to reduce debt and start 2023 on the right financial foot

How to reduce debt and start 2023 on the right financial foot

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  • December 19, 2022
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A large segment of Americans say that one of their top financial resolutions is to pay off onerous debt by 2023.

According to a study by Fidelity Investments, 32% of Americans planning to make a financial decision this year say they want to reduce their debt burden. This goes hand-in-hand with 39% saying they would like to save more and 28% surveyed wanting to spend less.

Another poll by The Ascent found that of the two-thirds of Americans planning to make a financial resolution for the New Year, 53% say paying off debt is their number one goal.

Yet just thinking about your debt, let alone making a plan and taking steps to reduce it, can be a daunting task. Below, experts outline tips for getting started and reducing various types of debt, from credit cards to car loans.

Go on a “credit card diet”

First, cut your expenses and avoid getting into more debt.

If you tend to accumulate credit card debt easily, consider transferring your expenses to a debit card or paying with cash.

“You could put $50 on a card here, a couple hundred there, and it can add up if you’re not prepared,” said Meredith Stoddard, vice president of life events planning at Fidelity Investments. “Set yourself up for success by making it harder to spend.”

“A lot of people have a habit of putting things on credit cards when they don’t have the money,” said Katie Brewer, a certified financial planner based in Dallas, Texas. “Balance the budget. Go on a credit card diet. That’s the first way to stop the accumulation.”

Create a budget and understand how much money you make and spend each month. For example, cut your expenses by cutting your streaming subscriptions or getting rid of an expensive gym membership. Increase your income by selling unwanted goods, taking on a part-time job, or temporarily renting out a room in your house.

“Then you have extra money to actually pay off that debt,” Brewer said.

Write down your debts

Experts also suggest adding up your existing debt and writing it down in black and white.

“Debt is often started and compounded by a lack of organization,” said Emily Irwin, senior director at Wells Fargo Wealth and Investment Management. “Track your expenses and create a list of your expenses, including your monthly debt payments for student loans, car loans, and things that are fixed and non-discretionary.”

In other words, “Do a financial check-in to make sure you’re not overspending monthly,” she added.

Also, make sure you are aware of the interest rates associated with each debt load. It can be difficult to determine the interest rate you’re being charged on debt through a lender’s mobile app or website, but the lender is required by law to list that rate on your statement.

Tackle high-interest debt first

Focus on paying off high-interest debt first, as it’s the most expensive to bear. It’s also worth contacting your lender and asking for a lower interest rate.

“Call your credit card issuer and ask for a lower interest rate. It’s one of those things that sounds kind of absurd, but about 70% of people who ask for a lower interest rate on their credit card get one,” said Matt Schulz, chief credit analyst at LendingTree. “It’s worth the call given what those success rates are.”

Credit card companies compete on rates, so they try to differentiate themselves in a competitive field.

How to deal with debt and inflation this holiday shopping season 01:50

“In the eyes of the banks, people have a high lifetime value, because the longer you have the card, the more you spend on it and the more the banks earn from you,” said Schulz.

Wells Fargo’s Irwin also recommends targeting your highest-interest debt first, regardless of the principal amount.

Once you’ve paid off your highest debt, funds are freed up to begin dealing with your next debt.

Credit card with zero percent credit transfer

Debt consolidation can make things easier to manage when it feels like they’re coming at you from all sides.

“When your debt is spread across four credit cards, there are so many bills coming in that sometimes you miss out,” Irwin said.

Consider transferring your debt to a credit card with an introductory 0% interest rate.

“It may seem strange to people to try to get rid of credit card debt by buying a new credit card, but the interest you can save by using one of these cards wisely can be really significant and drastically reduce the amount of time you spend on that balance.” pay off,” said Schulz.

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