Get Out of Debt!

get debt free 2010

Your 2010 New Year's Resolution

At the end of 2008, total credit card debt in the United States reached $972.73 billion, according to a Nilson report; average outstanding credit card debt for each household that had a credit card was $10,679. The numbers are sobering. The new year is a time of hope and optimism -- a chance to make some changes that will improve our lives and our well-being. In terms of getting out of debt, good intentions will get you started, but to get it done you need a plan.

Prepare a Budget

Your plan to get out of debt should be based on a budget. Your budget will tell you how much you have available to pay down debt after subtracting all fixed and variable expenses from your monthly income. Your fixed expenses include your mortgage or rent payment, homeowners association fees, car payments and student loans, utilities, telephone, Internet, insurance and retirement savings. Variable expenses include food, clothing, transportation and entertainment. On the National Foundation for Credit Counseling Web site, you can find a budget worksheet that can help.

A budget gives you a clear picture of where your money is coming from and where it is going. The budget is a tool to guide you in your financial planning, your spending decisions and your debt reduction. But it is only useful if you keep track of your actual income and expenses and compare them to your budget.

In preparing your budget, you can include all the minimum payments you have to make on your credit card accounts and then see how much of a budget surplus or deficit you have. If you have a surplus, you can use it to pay more than the minimum payments. If you have a deficit, you need to either reduce your expenses, increase your income or both.

Determine Your Debt Payment Strategy

To begin to pay down your debt, you need to know exactly where you stand. Pull together your bills and prepare a list of all your debts and the corresponding interest rates.

In terms of getting out of debt, good intentions will get you started, but to get it done you need a plan

Once you know where you stand, you need to determine where to start. According to Rebuild.org, you should first get current on any outstanding mortgage or car payments. These are secured loans and late or nonpayment can cause you to lose your home or car. Once these are current, you can concentrate on credit card and other debts. Of course you need to continue paying at least the minimum payment due on all your accounts to avoid late fees and potential damage to your credit score. But to begin paying down debt, you need to pay more than the minimums.

Paying down the debts with the highest interest rates is the most logical approach, since it results in the lowest interest paid. But some people like the motivational aspect of paying off the smaller accounts first, regardless of the interest rate. You should choose the method that works best for you.

Reducing your interest rates will help considerably in paying down your debts more quickly. Call your credit card companies and see if they can lower their rates. If not, see if you can transfer the balance from a high-interest account to a lower interest account. But be careful of new credit cards that offer initial zero or low interest rates before you transfer a balance. The rate may increase substantially after a certain period of time.

Once you've paid off an account, don't close it, especially if you've had a long relationship with the creditor, advises Money Magazine. Having available and unused credit will help your credit score.

The luster of New Year's resolutions can often fade after a few months. But getting out of debt involves a long commitment. It may take you a year, five years or longer. Stay focused and motivated. In the end, all of your work and sacrifice will be worth it.

Kevin Hagen