Get Out of Debt

• Step 1 Calculate your debt load

  Put together an overall picture of your finances so that you can find ways to trim expenses, carve out savings and reallocate those funds to eliminate debt.

  List all fixed monthly expenses, including mortgage or rent, utilities, car and other loan payments, phone/cable/Internet costs, child-related expenses and pet costs.

  Estimate non-fixed monthly expenses, such as groceries, dining out, entertainment, gas, haircuts, dry cleaning and medical costs.

  Estimate non-monthly fixed payments, such as periodic insurance, car maintenance, gifts, back-to-school shopping, gardening, and the like. 

  List all credit card or other monthly debts. For each debt, include the interest rate, minimum payment and penalties for late payments.

  Add these numbers and compare this to your income. It gives you the big picture on where you stand.

• Step 2 Understand acceptable vs. bad debt

  Some debt is okay. Borrowing to purchase a house or pay for a college education allows you to improve your life in a tangible way now while investing in your future.

  Other debt is detrimental. Carrying a balance on your credit card, using loans to buy a vehicle you can't truly afford or having to resort to a pay day loan means your lifestyle is outpacing your income.

• Step 3 Stop accumulating bad debt

  • Stop using credit cards. Cut up all cards except the lowest-interest one with available credit, to use only in a serious emergency. Use debit cards instead. Better yet, pay cash for everything you can. Actually handing over your hard-earned cash is a big incentive to be more cost-conscious.
  • Get rid of everything you can live without that has a depreciating value that you bought with a loan, such as a second car or lawn tractor. Pay off as much of each loan as you can with the proceeds, then try to negotiate lower payments on the remaining balances.
  • Never take out a pay day or other high-interest loan. They’re as bad as credit cards at getting you into a vicious cycle of debt, with sky-high interest rates eating up your money quickly.

• Step 4 Negotiate lower payments

  Call your credit card companies to see if you can negotiate a lower rate. Some have other cards you may qualify for with better terms, especially if you tell them that you are closing the account if you can't get better terms.

  Search online for a credit card with a better interest rate and investigate transferring your balance. Be aware that balance transfer fees typically run 3 to 5 percent. Make sure the savings are worth it.

  Consolidate loans to get a better interest rate, although you need collateral to do this. A second mortgage is one possibility, but be careful — you’re putting your house on the line. Some credit unions, especially those through an employer, extend signature loans and are more flexible with what they accept as collateral.

  If mortgage interest rates have dropped more than 1 or 2 points since you closed, it’s probably worthwhile to refinance this debt. Refinancing fees can be built into the loan so you don't have to pay any money up front.

  Check the rate on your car loan too. You may be able to refinance and save money every month.

• Step 5 Come up with more money

  Eliminate expenses. Examine expenses aren't absolute necessities as candidates for cutting, so that you can, at least for a while, delegate those dollars to debt repayment.

  Trim spending. Cut back on your cable package. Color your own hair. Eat lunch out once a week instead of two or three times. Rather than going out to restaurants with friends, do cooperative dinners or potlucks where everyone brings a bottle of wine. Cut the gym membership you don't use very often and go for a daily walk instead.

  Let others pay their way. Many people with debt problems are supporting or covering bills for older and adult children or older parents. Consider whether you should continue.

  Avoid late fees. If you're regularly getting zapped with late fees, do your best to avoid them by getting organized and staying on top of your bills. Take 5 to 10 minutes every day to balance your checkbook, open new bills in the mail, check your accounts online and pay a bill or two. Put the money you've been spending on late fees into debt repayment.

  Sell everything you can. Gold is fetching a good price and a reputable jeweler can help you sell it. If you have an old car, power lawn equipment, exercise equipment or anything else that might generate some cash, now is a great time to sell it.

• Step 6 Consult with a consumer credit counselor

  A good credit counseling agency can offer suggestions or help you set realistic goals to eventually pay off your debt. It can also help you come up with a debt management plan by reducing interest rates, eliminating late and overlimit fees, ceasing collection calls and letters and bringing a delinquent account up to date.

  Many consumer credit counseling agencies do an excellent job of helping people assess their financial situation, negotiate lower interest rates and set up a repayment plan. The best ones offer free counseling sessions and modest one-time fees as low as $50 for the service, distributing the rest of their cost to creditors.

  But there are also disreputable agencies that prey on people in a tight spot. Beware those that want to do credit counseling only over the phone. They often have hidden fees and charge excessive interest rates on a new loan.

  Look for a consumer credit agency that is non-profit. Ask if the agency is certified by an organization such as the American Association of Debt Management Organizations or the National Foundation of Consumer Credit. Counselors may be certified by the National Association of Certified Credit Counselors.

  If in doubt, ask a loan officer at your local bank to recommend a consumer credit advisor in your area.

• Step 7 Declare bankruptcy as a last resort

  In extreme cases, bankruptcy may be the only answer. A reputable consumer credit agency can help you determine if bankruptcy is your only available option.

  Bankruptcy helps you wipe your debt slate clean so you can get a fresh start. However, it also damages your credit rating and can make getting future loans more difficult.

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