What is the Best Way to Eliminate Debt?

For most people, the best way to eliminate debt is to reduce or pay off outstanding balances on credit cards. Unlike other forms of debt, such as housing mortgages or business loans, credit card debt is not related to an asset that can gain in value, and large outstanding balances can actually damage your credit score. There are several good methods to reduce credit card debt. Beware of companies that offer to reduce or eliminate debt for a fee; these are often fraudulent schemes.

One method to eliminate debt on credit cards is the "roll-down." Rather than paying just the minimum on multiple credit cards, pay at least the minimum on all plus extra on the card with the highest interest rate. This pays off that debt more quickly, reducing the amount of interest paid on that account. Once that card no longer has an outstanding balance, apply the extra amount to the card with the next highest interest, and continue until all high-interest cards are paid off. Reducing large outstanding balances will improve your credit score.

Another method is the "snowball approach." Pay off the card with the lowest outstanding balance first, regardless of interest rates. This reduces the number of bills you pay each month. The benefit is psychological as well as financial: Getting a card balance down to zero gives you more economic elbow room, aids your credit score, and provides a feeling of accomplishment. You can also combine these methods; for example, you could divert the extra amount on the high-rate card for a few months to completely pay down a smaller debt and get it out of your hair.

Other financial advice experts offer on eliminating debt includes buying less with credit and paying more toward the debt you already have. This will require a certain amount of will power and possibly some financial maneuvering. If you have sudden medical expenses, don't take out a loan or use a credit card; explore available financial assistance programs and try to negotiate payments through a patient's advocate. Use debit cards for everyday purchases such as groceries, and save credit cards for bigger purchases, when you can take advantage of a longer payment schedule and increased consumer protection. Find out which of your credit cards has the lowest interest rate, and make that your first choice for credit purchases.

Be cautious about companies that offer to reduce or eliminate debt for a fee. Many such companies can be fronts for identity-theft swindles. In the U.S., the Department of the Treasury advises contacting lenders directly for help with debts and payments, rather than going through a third party. The U.S. Department of Housing and Urban Development offers a list of genuine credit counseling agencies that have been vetted and approved by the American government.