If you spend more than what you earn, you are creating debt. The debt will keep snowballing from month to month if it is not being managed properly. It can become financial burden when it hits the level beyond your financial affordability. Therefore, you should get rid of it as soon as possible while it still at a manageable level. Here are the 4 tips that can help you to shrink your debt.

1. Medical Debt Negotiation

You may get drowning into medical debt if you do not have emergency fund to handle a sudden need of cash for major medical expenses. The debt can be a great burden if you don't find a solution to resolve it. Medical providers normally are often open to working out a payment plans for their patients if the bill is beyond their financial capability. So, talk to your medical provider to find a potential solution to the medical debt. In addition, many hospitals have government funds to help patients who can't afford in their medical care, and there are independent nonprofits that can provide financial assistance if you need helps.

2. Credit Card Debt Consolidation

Credit card debt carries the highest interest rate. It can run as high as 33% for cardholders who late in payment or have low credit score. If you owe credit card debt, it may easily hit you at overwhelming level if you do not handle it properly. The best way to avoid the high interest rate of credit card is by transferring it to a lower interest-rate loan through a process called debt consolidation. Search around to find a consolidation loan that best fit you and consolidate all your credit card debts into this loan. Today, credit crunch has led to the lowest interest rate ever. It is a good opportunity to consolidate the high interest rate credit card debts into a low interest-rate loan.

3. Mortgage Refinancing Through "Hope for Homeowners" Program

If your mortgage payment is getting hard to afford, then you should take some actions to resolve before you lose your home due to default payment. In order to recover from credit crunch situation, the government has introduced programs that encourage lenders to do mortgage refinancing for their clients if the clients are at risk of losing their homes. According to the record, there are more than 200 lenders sign up with the government-run program called "Hope for Homeowners" since it introduction and more lenders are expected to join the program. You can contact your lender to see whether it is participating into the program. If it is, then you could make a request to refinancing your mortgage under the program which has much lower interest rate to reduce your debt burden.

4. Credit Card Balance Transfer

You credit cards may have different interest rate. If clearing off the credit card balances are not possible at the moment; then transferring the balances to the credit cards with lower interest rate will be a good option to save some money. But, you must be careful about the balance transfer terms as most of the low interest rate offered in balance transfer has a due date. After the period, the interest rate will either go back to the same level or some may even higher than before. Therefore, you should carefully read the fine print of the terms and conditions to ensure the interest rate after the promotion period don't hurt you.

Credit card has been part of the necessity for most people because it provides the convenient in purchasing almost anything at anywhere. But, not all consumers will pay in full amount on what they have spent every month when they receive their credit card statement; instead, they just pay the minimum. The balance will become their debt for next month. The debt keeps rolling and snowballing month by month until they feel the pressure when it becomes a financial burden. Do you know the true cost of just paying the minimum on your credit card debt? You will surprise when you make the true calculation on how much the costs in term of dollar and time you need to pay for the convenient of using credit card.

In order to have a better picture on the true cost that you need to spend to clear your credit card debt by just paying the minimum amount of the monthly balance, let's use a case scenario with a few assumptions:

Case Scenario:

John Hudson has 3 credit cards with balances. The amounts & interest rate for these three credit cards are as below:

1. Card 1: $5,000 balance with 12% interest rate.


2. Card 2: $3,500 balance with 18% interest rate.


3. Card 3: $2,000 balance with 16% interest rate.

There are people using debt to create wealth, such as getting loans to be invested into their business and make money from there. However, most people are carrying bad debt that created from uncontrolled credit card usages. Bad debt is always a road block for the wealth creation, you should always try with your best effort to get rid of it before it becomes a financial burden. There are many ways to eliminate it, selecting the best solution can help you get rid of it in the shortest period of time and with least money spent on interest & other fees.

Here a few tips that can help you to eliminate debt:

1. Consolidate Debt To Lower Interest Rate Loan

You can take advantage of debt consolidation benefits that enable you manage it effectively while saving some money in term of interest. If you have averagely good credit score, the recent government action that involves the interest rate debt may benefit you. The ever lowest interest rates are now available in the finance market. It's a good time for you to consolidate your multiple debts into a low interest-rate consolidation loan to enjoy the benefits.

2. Pay At Fixed Payment Above The Minimum Amount To Get Rid of Debt Faster

Most people tend to pay just the minimum amount statement in their credit card statement. This payment method will take forever to clear the credit card balances. Unless you are really can't afford to pay more than the minimum amount, you should always pay more because it will help you to be debt free faster. For example, if you have $10,000 credit card debt with interest rate at 10%, if you pay just pay the minimum amount based on 5% requirement every month you receive your credit card statement, it will take you 8 years to pay off the balance, but if you make a fixed payment, say $500 a month constantly, you can be debt free in 20 months. Can you see by paying at fixed amount above the minimum payment requirement, you can pay it off within 2 years.

3. Pay More On High Interest-Rate Debt First

You probably have multiple credit cards with different interest rate and each one carries a balance, which debt to be paid first when you have extra money? Basically you can choose to pay more on the credit card with smallest balance first or focus on paying highest interest-rate debt with the extra dollars you have. But, if you want to get rid of it fastest and paying the least interest, then focusing on paying high interest-rate debt is the way to go. 

4. Eliminate Optional Expenses

You can't get rid of debt totally if you keep adding more into the exiting balances. Therefore, it is important for you keep the expenses within your budget. If you list down your monthly expenses and carefully review them, you should find some of items are optional, which can be eliminated to save money. The money you have saved can be used to pay toward your debt so that you can get rid of it faster.

Summary

Bad debt can become a financial burden if you do not manage it properly. If you have created it, it is important to get rid of it as soon as possible so that it won't become a road block to your wealth creation.

In your efforts to get rid of debt as soon as possible, you pay more toward to your debt when you have extra money. On every extra dollar you make, you will save in total interest and shorten the time you get rid of it significantly. The question is which debt should you pay first with the extra dollars you have?

There is no right or wrong answer; it depends on what you want. Most debt relief guides will go for the approach of paying the highest interest-rate debt first. In fact, this is a better approach because it will save more money and helps you to get rid of it faster. But, psychologically it is a more stressful approach as you will feel that there is no movement in reducing your debt during the process of paying it because all debts still remain. On the other hand, if you choose to pay off debt with smallest amount first, then psychologically you will feel that you are getting rid of them one by one. So, whether you should pay more toward smallest amount debt or focus on paying the highest interest-rate debt depends on your choice. However, let's explore each approach by example so that you have better picture on which approach suit you better.