How to get out of debt

USA Today (Society for the Advancement of Education), August, 1995

Perhaps you are among the 70% of Americans who carry some credit card debt, or the many whose debt load consumes 15-20% or more of their disposable income (not counting the mortgage). A reckless use of credit cards or a piling up of installment payments such as car loans may be the cause of your difficulties, or you simply may have been hit by unexpectedly high legal fees, medical bills, or home repairs. Whatever the cause, what can you do to get out of the financial hole? The Institute of Certified Financial Planners recommends taking the following steps:

* First, get under control the things that got you into debt in the first place. Pay any new charges off each month, limit use, or quit utilizing them entirely. Don't buy anything on the installment plan. Pay cash.

* Make a spending plan. See where your money is coming from and going to. Target areas to cut expenses. Sell off that expensive car or quit buying a new one every two years. Brown bag your lunch. Buy less expensive and fewer clothes. Get outlays below income so you can being putting extra money toward your debts.

* Get a second job or work extra hours to generate more income.

* Fold down your debts. First, pay off an initial debt as quickly as possible, perhaps using a tax refund, bonus, or extra monthly cash flow generated by cutting expenses. Continue making all other monthly payments as you were doing before. Once the initial debt is paid off, add that payment to the one on the next debt until it is paid off as well, etc.

You can fold down debts in different sequences. Paying off the debt with the highest interest rate first saves the most money in the long run. It may be psychologically easier, though, to start with the one with the smallest balance or the fewest payments. That way, progress can be seen more quickly.

* If you can't make minimum required payments to all your creditors, you may be able to negotiate lower, pro-rated installments. After appropriate belt tightening, say you can afford to pay $300 a month toward total debts of $6,000. That means you can make pro-rated payments of five percent for each creditor. If you owe a particular creditor $3,000, your pro-rated payment would be $150 a month. Ask your creditors about pro-rating payments as quickly as possible - they will be more likely to be agreeable. Pro-rationing loans such as a car, since the creditor may decide to reposses the property.

* Consolidate your debts. For instance, if you have several credit cards, you could pay them all off with a single card offering the lowest interest rate. (Be sure to cut up the old cards so you don't run up charges again.) You also can consolidate with a home equity loan, which often carries a lower interest rate that usually is tax-deductible.You may be able to borrow at reasonable rates from your retirement plan or the cash value in your life insurance. Just be sure to review the costs and other potential financial ramifications of these choices thoroughly.

Be careful that you don't consolidate several low interest rate debts at a higher single rate. The consolidated payment should be smaller than the total of all the payments over the same time period. Also, do not consolidate debts that typically don't charge interest, such as doctor or lawyer fees.