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Three B.A.D. Ways to Reduce Debt

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This guest post is from Ryan at Debt Reduction Forumla. He’s currently is reducing his debt from $75,000 to zero and letting you look over his shoulder. If you like what you see here, stop by his blog or you can subscribe to his feed here.

This is the first guest post I’ve written for Tricia. So I spent a few days thinking about a title that would get your attention.

That’s when I came up with “B.A.D. Ways to Reduce Debt.”

Of course, B.A.D. stands for Blogging Away Debt.

To write this post, I went back through a number of Tricia’s blog posts to see what strategies she has personally used to reduce her debt during the last two years. Here are the three debt reduction strategies I came up with, along with how I’m using those same strategies.

Strategy #1: Create accountability.

When Tricia began her debt reduction journey, she started this blog to create accountability. I took a similar approach when I started writing Debt Reduction Formula. I did it, in part, for accountability.

But a blog is a lot of work, especially if you want to attract regular readers. What’s a busy person to do?

At first, I simply created a spreadsheet that listed all of my debts, their interest rates, and minimum payments. This created personal accountability because I had to acknowledge my debt problem and see whether it was getting better or worse each month.

I continue to update that spreadsheet every month to see how much progress I’m making.

Even personal accountability like this goes a long way toward keeping yourself motivated. (And, trust me, you WILL need something to keep you motivated as you pay down your debt.)

Strategy #2: Minimize finance charges.

Another debt reduction strategy Tricia has used is minimizing her finance charges by looking for the lowest interest rates possible.

In one post, Tricia shares that she called around to credit card companies to get rate reductions, paid off as much debt as she could to improve her credit score, acted on balance transfer offers when she received them, and even took advantage of a Prosper loan at one point.

We’ve all heard about minimum payments. But, if you’re like me, you may not have thought in terms of minimum finance charges. (I think I finally stumbled upon this concept a couple months ago.)

Let’s say you have monthly minimum payments of $800. If you look at how much interest you’re paying, you may discover that $600 of the total monthly minimum is going to interest!

By reducing finance charges, you free up more money to pay down principal, which accelerates your debt reduction.

Like Tricia, I’ve gotten reduced interest rates on a few credit cards. And I, too, recently got a Prosper loan to consolidate two loan balances. By doing this, I literally slashed my interest rate in half. (I’m now paying 11% instead of 22%.)

Strategy #3: Throw extra money at debt.

Perhaps this seems like a no-brainer.

But think about the “economic stimulus check” most folks will get this May/June. No doubt, some people will use it to pay off debt. But many people will spend it on a new widget or doodad.

A close friend and I were talking, and we speculated the number one purchase this economic stimulus money will be used for is… a new flat-screen TV.

Not debt reduction.

Tricia writes that 100% of their 2005 tax return was used to reduce debt in 2006. And while it’s easy to admire that kind of commitment, it’s hard to put it into practice.

Currently, I’m also using extra money to pay down debt. Where does it come from?

Since I’m self-employed, I have periods of time when I’m cash-rich and other when I’m cash-poor. So whenever I get paid a project fee, I take whatever portion I can to pay down debt.

I’m actively pursuing different ways to grow my business so I’ll have more cash to throw at my debt. Not to mention, I recently received an unexpected inheritance, which I’m using to reduce debt as well.

So tell me: what B.A.D. ways to reduce debt have you personally used? Leave a comment below.

Thanks Ryan for the guest post!