The beginning of a new year offers the chance for a fresh start with your budget and financial strategy. For those in debt, it should mean the opportunity to commit yourself to saving money and reducing what you owe. To help, the team from Bills.com has outlined some advice to assist with both of these goals so you can pay off debt once and for all.

Step 1: Saving Money to Pay Off Debt

Chances are that over 2011, your budget increased or your financial discipline slackened. Use the new year to revisit your budget and find even more money to save.

First, trim back those expenditures that might have risen. Then identify opportunities to save even more money based on changes in your life. Switched gyms? Make sure to eliminate recurring charges that you forgot to cancel. Stopped reading your magazine subscriptions? Remove automatic renewal from your credit card.

You can also find a number of small savings opportunities within a monthly budget that can add up over time. For example, eliminating an extra $10 a week between lattes, groceries or lottery tickets can total an extra $500 in savings for 2012. Check out the My Savings Machine calculator from Bills.com to identify some more easy money-savers that could add up to big dollars.

Step 2: Reducing Debt You Currently Have

With that extra money in hand, now is the time to remain disciplined and begin reducing debt. By allowing your credit cards to continue accruing interest, you are only lining the pockets of the credit card companies.

Take your extra monthly savings and apply it to your outstanding credit card principle. It will help reduce the interest you owe and give you a shorter horizon to freedom from debt. Do not rely on minimum payments to get rid of credit card debt–they reset every month as a percentage of your balance and can trap you in debt for years to come.

In addition, there are a number of possible options for reducing debt. Each has its own unique advantages and dangers. They include:

Optimized Self-Payment

Many households with a small amount of debt can eliminate it through better budgeting or customized self-payment schedules dubbed “avalanche” or “snowball” to more quickly eliminate debt, interest and your overall balance.

If you have some flexibility within your monthly budget or have cash resources on hand, this is the best option to consider because it does not impact your credit score or expose you in any way to creditors.

Cash Out Refinance

Those families that hold high credit card debt with little cash reserves, but do have a good credit score and own a home with a significant amount of equity, might consider a cash out refinance. With mortgage rates still at all-time lows, this is a good time to secure a refinance if you qualify.

In this transaction, you would borrow enough money to refinance your home and pay off debt at the same time. This consolidates higher credit lines into your home loan and a single payment with a lower interest rate.

The danger is that you are moving unsecured credit card debt into a secured home loan, meaning you are placing your house as collateral in the event you default. Families should carefully examine the loan payment schedule and their financial situation to ensure they can meet payment obligations on the new loan.

Credit Counseling

Credit counseling companies negotiate standard reductions of penalties and interest charges on debt, but leave the actual principal balance intact. This offers a reduced time to payment and lowered monthly payments with minimal impact to your credit score.

However, it is generally a small reduction in the overall amount you owe, and the fees charged by counselors can add up over time. This avenue is generally best for those who have a large amount of debt but aren’t in dire circumstances.

Debt Settlement

Debt settlement is an aggressive course of action in which you do not make payments to creditors while a settlement is negotiated on your behalf. This can dramatically reduce the amount you owe creditors while also resolving your debt quickly. However, it will lower your credit score and can subject you to debt collection efforts and even lawsuits.

It is best reserved for those with a high amount of debt and no realistic way to resolve it. The only remaining option other than debt settlement would be to declare bankruptcy.

Which Option Leads to Freedom from Debt Fastest?

The challenge is gaining an accurate picture of your debt situation and then choosing the appropriate measure for your needs. At Bills.com, we recently launched a tool to help with this decision making process.

Debt Coach is a free tool that provides you with a complete picture of your debt, and then asks you to set priorities for your personal situation (ex. maintain credit score, eliminate debt quickly) so it can recommend the best option for your needs. The tool is also filled with videos and other resources to help explain debt terminology and solutions so that you are well armed with information.

Source: http://www.gobankingrates.com/debt/freedom-from-debt-2012/