Being Grown-Up About Debt
by George Mannes

February 9, 2007

[Continued, page 2]

Play Tricks on Yourself

The next step, of course, is to stop the behavior that got you into trouble. Don't count on your willpower. Take the credit cards out of your wallet and lock them in a drawer to create a physical barrier between you and spending. That way you create a cooling-off period during which you may decide that your must-have purchase is something you can live without. For big purchases, save money in labeled envelopes and delay buying until you have the cash required.

Make Success Simple(r)

Once you've put a brake on going further into debt, start making a dent in the amount you already owe. You're far more likely to make steady progress if you have a specific game plan to follow, rather than, again, just relying on willpower. The best strategy, if there's a wide spread in the interest rates on your debts: Pay off your highest-rate debt first, making the maximum monthly payment you can afford on that card and paying the minimum required on the rest. As the interest buildup on that card goes down, you'll automatically start paying down principal faster. Repeat the process with the next highest rate card and so on.

If the rate spread among your loans isn't big, pay off your smallest debt instead. The results feel more meaningful, and you'll get a psychological boost from paying off a card completely. "It encourages good behavior," says financial planner Scott Cole in Birmingham.

Beware the Easy Out

To save on interest charges, the Trejos paid off all their cards last December with an 8.39% home-equity loan of $32,000. But while the strategy looks good in theory and is working for them so far, you want to be cautious about using low-rate home-equity financing to pay off plastic. Lower finance charges won't solve your debt problems if you don't also change your behavior. And unlike credit-card debt, home-equity debt puts your house at risk. If you backslide on credit-card repayment, you'll end up worse off than before, owing money on both your cards and your home.

Get Help If Needed

Rather than fight the battle alone, get help from a credit counselor, who can provide a firm hand on your shoulder, guiding you, devising a repayment plan and maybe negotiating lower rates with creditors. To find a legitimate agency, contact the Association of Independent Consumer Credit Counseling Agencies (aiccca.org) or the National Foundation for Credit Counseling (www.nfcc.org) and steer clear of up-front charges of more than $75.

Think Outside the Debt

Finally, as bad as your debt may be, don't use it as an excuse to ignore the rest of your financial life. Set a little money aside for an emergency fund so the next time life knocks you for a loop, you won't start borrowing again to recover. Put a token $25 a paycheck into your 401(k) to get in the habit of saving.

Willy and Jessica are, in fact, contributing to their retirement plans and setting money aside for emergencies (adding to the $9,000 they have left from their home-equity loan after paying off their cards and personal loan). They've cut up all their credit cards but one, which is tucked away in a drawer. The tension over the birthday party has given way to new optimism about their finances. "We're talking every day about expenses," says Jessica. "I think our future looks much better."

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