How to Create a Debt-Reduction Plan

Debt can be daunting, especially when the statements keep rolling in with no end in sight.

Paying off your debts isn’t going to happen overnight—especially when consumer debt totaled $2.5 trillion in the U.S. in December 2011--but you can speed up the process by strategizing a plan and sticking to it.

Begin your pay-down process by pulling a free credit report at AnnualCreditReport.com and ranking your debt in a spreadsheet by balance, rate, minimum payment and the number of payments left, recommends Denise Winston, a financial educator and founder of MoneyStartHere.com.

Once you have a spreadsheet, determine a fixed monthly amount you can pay to pay down your debt. If possible, this amount should be more than the combined minimum payments on all of your cards, adds Kevin Gallegos, vice president of Phoenix operations for the Freedom Financial Network.

Next, pick two or three target debts and plow as much as you can above the minimum payment on them, Winston says. “You will be amazed at how good you feel by simply knowing how much debt you really have and putting a plan in place to get rid of it.”

Experts warn that the debt-paying process differs with every financial situation, but there a few basic guidelines that can help reduce multiple debts in a timely manner.

Limit your spending. To find extra cash to put toward principal, sell home products and items you no longer use at a yard sale or online. Small steps like scaling back on takeout and restaurant foods, clipping coupons and applying any tax refunds to the debt, can make a big impact on your debt amounts without significantly changing your lifestyle.

And while it sounds obvious, it must be said: Stop using the credit cards to keep the balance from rising. Winston suggests placing them in an envelope with a note about how debt makes you feel to serve as a reminder of your situation when you're tempted to use it.

Pay your lowest balance first.  “This one can make you feel fantastic because you are quickly making headway,” Winston says. “A $100 balance on a credit card can quickly be paid off, and then you take that payment and apply it to your second target.”

Next, pay debts with the highest interest rates. You'll be getting rid of your most expensive debt and reducing total interest paid this way, Winston says. But be patient with this step, it could take a while.

Sort through your statements and find your lowest interest rate and use that as leverage with other creditors to lower their rates, recommends Kimberly Foss, founder of Empyrion Wealth Management. “Persistence can pay off.”

Lastly, tackle secured debt with the smallest number of payments remaining. For example, if you have a car loan with a $450 monthly payment and five months left, putting a little extra towards it pays off the loan faster. Then take the entire payment and target your next debt, Winston says. If there isn't one, save it so you don't accumulate more debt.