There are two basic steps to reducing and eventually eliminating debt. First, you can determine your situation, develop a plan, and then take action. This plan involves finding ways to reduce your debt payments (lower interest rates, home equity loan, etc.) and/or using a payment strategy that pays off one loan first and then applies that payment to more quickly paying off the next loan. Second, you can find ways to reduce your spending and apply these savings to your loan payments.

Reduce your debt payments
For fixed payment loans, such as your home mortgage, car loans, home equity loans, etc., the most common options are to refinance the loan. If your home mortgage interest rate is more than 1% higher than current rates, you may be able to refinance your mortgage at the lower rate. However, you must consider the costs associated with refinancing and the amount of time that you intend to remain in the home, and you must also qualify for this new loan at the reduced rate. To determine whether this option will benefit you, try MSN's Mortgage Refinance Calculator.

If you have equity in your home, you may also be entitled to a home equity loan which you can then use to replace your other debts with a new loan at a lower interest rate, and the interest charges may also be tax deductible. Home equity loans are slightly higher than mortgage rates, but less than credit card rates, so this option may be beneficial. Usually, lenders will only loan you up to 80% of the value of your home minus your existing mortgage balance. For example, if your home is worth $100,000, 80% of that value would be $80,000. Subtracting your existing mortgage of $50,000 would mean you could borrow up to $30,000. Of course, there are other lenders that will offer to let you borrow more, but they typically charge more closing costs and a higher rate.

In either of these cases, refinancing a new loan or obtaining a home equity loan, contact a lender for details, beginning with your current lender.

For credit cards, you may be able to lower your rate. First, if you have any other credit card offers at a lower rate, contact your credit card company, explain the other offer, and see if they will lower the rate on your current account. Second, if you do have any balance transfer offers to a lower rate, apply for the card and, once you receive it (and not before), do the balance transfer. If you have any more questions, make sure you are informed before you do any balance transfer.

Identify ways to reduce spending
Most people can identify certain expenses that could be reduced or eliminated. You can go out to dinner less often, cut back on the number of movies you see, stop buying that special cup of coffee everyday, etc. You can even make more drastic changes, such as quitting smoking, if reducing your debt is important enough.

The key here is to analyze your spending and identify how much could be saved by making some changes in your lifestyle or spending habits. Use a piece of paper divided into two columns. First, list those items that you could spend less on or even eliminate. Second, identify how much this would save you every month. If you are having trouble identifying ways to save, or if you would really like to analyze your total spending and reduce every expense you can, consider developing a budget.

Step 3 - Reduce Your Spending