6 ways to climb out from under a mountain of debt: In over your head? Here's how to get out of the red.
Christopher J. Gearon/New York Daily News
21 December 2011
If leading world powers from the U.S. to Europe — with all of the experts, analysts and financial advisers at their disposal — can get into a financial crisis by taking on too much debt, it’s no surprise that millions of Americans face a debt crisis of their own.
It can put enormous stress on families — and in worst-case scenarios, end up with people losing their homes.
And the impact is long-lasting. Too much debt can prevent you from buying a home, increase your insurance costs, disqualify you when applying for a job, cause marital strife, and stifle future financial growth.
Currently, U.S. households owe a mind-boggling $2.3 trillion in non-real estate debt, driving increasing numbers of Americans to turn to experts for help. The big challenge is how to deal with it.
Carole Carroll and her husband Donald, from Queens, got stuck in the dangerous habit of borrowing from one card to cover monthly balances on others, hoping it would give them time to improve their situation. It did not.
“It was like an avalanche,” says Carroll, who saw their credit card debt rise to $88,000 after trying to cope with job loss, family obligations and other financial burdens.
It took them four years of buckling down to pay off their debt, but the Carrolls were elated when they finally paid off what they owed — and lifted their credit scores from the low 500s to the high 700s.
Here are key steps that experts recommend for getting out of the red permanently:
Determine what you owe. “We didn't actually know how much we owed,” said Donald, until he and his wife sat down and itemized their obligations.
Making a list of all debts, payments, interest rates and terms, say debt counselors, is a first step to getting out of a financial hole.
Consider professional help. The Carrolls contacted GreenPath Debt Solutions, a nonprofit credit-counseling agency recommended by the National Foundation for Credit Counseling.
The agency helped the couple devise a debt management plan and negotiated lower interest rates for them. When seeking advice, stick with nonprofit members of NFCC or financial planners affiliated with the Financial Planning Association.
Drop your credit cards. A year before they got married this past September, New York couple Tracy and Vincent Romano decided to attack their combined debt of $200,000 from school loans and credit cards.
“I had no self-control,” says Tracy Romano,
adding that they now stick to paying for everything with cash and debit cards.
Trim the fat. Track your spending for 30 days, as it could open your eyes.
A $3.95 daily specialty coffee during the workweek would cost nearly $28,000 over a 35-year career, says financial planner Steve Orr.
Investing that money instead would earn roughly $247,000 at just 3% interest over the same period.
To save money, the Romanos stopped eating out regularly and got a family cell phone plan.
Other ways to save that can quickly add up: Cut $10 a month from such expenses as groceries, utilities, gas, gifts, and clothing; stop smoking, playing the lottery, and other costly habits; and quit paying for things you don’t use, like gym memberships.
Think creatively about bringing in more money. Debt counselors suggest that clients find ways to boost income. Options include taking on overtime shifts, getting a part-time job, staging a yard sale, or even selling other assets.
Use carrots and sticks. “Be kind to yourself,” advises Erika Safran, the Romanos' financial planner, who encourages clients to sock away savings while paying down debt.
NFCC vice president of membership and public relations Gail Cunningham agrees. Whether it's going out to eat occasionally or saving for a vacation, she says, “a debt diet is like a food diet — if you cut too much, you'll go off your diet.”
Excerpted from U.S. News & World Report's special edition “50 Smart Money Moves for 2012” ($5.99). To order: 800-836-6397 or amazon.com.