first step in reducing your debt

The first step in reducing your debt is to work out exactly how much you owe. Now, this may sound obvious but you’d be surprised how many people know they have have debts with various credit cards, store cards and loans, know they’re paying monthly towards them, but don’t know what the outstanding balance is (or are too afraid to look).

Make a list, separating out each individual debt. Be sure to include all your:
- credit cards
- unsecured loans
- loans secured on your house, e.g. mortgage
- other secured loans
- store cards
- bank overdrafts
- car finance
- other hire purchase (furniture, electrical goods etc)

Next you need to write down further details of each one. Find out what the interest rate is for each of the debts, how much you are paying each month and how much longer the debt has to run, either by checking your statements or by calling the companies.

Now write a new list; put your mortgage (if you have one) at the top of the list, followed by any other loans secured on your house. The reason for this is that these are the repayments with the highest priority: the last thing you want to do is concentrate on paying off other debts, but have your home reposessed in the process. Underneath these draw a line then write your other debts, in descending order of interest rates, i.e. the highest at the top. Your list should now look something like:
Abbey Mortgage - 6% - £126,000 - 22 years - £850/month
Ocean Finance Loan - 7.9% - £28,250 - 4 years - £625/month
—————————————————————
Debenhams Store Card - 29% - £1250 - indefinite - £80/month
NatWest overdraft - 17% - £900 - indefinite - £0/month
LloydsTSB overdraft - 18.7% - £850 - indefinite - £0/month
NatWest Visa - 16.9% - £3700 - indefinite - £85/month
Barclaycard - 14% - £5250 - indefinite - £95/month
Car hire purchase - 10.5% - £9,500- 3 years - £222/month
NatWest Loan - 7% - £6300 - 3.5 years - £142/month
Total debt - £182,000Total payment/month - £2099
The plan now is two-fold: pay off debts with the highest interest rates first and, where possible, move debts to a lower interest rate without extending their life.

This last point is very important. Although your monthly repayments will be lower you will stay in debt for longer and could end up paying more in total over the life of the debt. For example, £10,000 over 3 years with a 10% interest rate is £322/month; over 5 years at 7% it is only £198/month. However, with the second option you would have stayed in debt for 2 years more and paid an extra £264 in interest. Only if you are stuggling to make repayments should you ever consider extending the life of a debt.

Source: http://www.debtassistant.co.uk/