Other strategies for debt elimination: 10 steps to elimination

All it takes to fall behind on credit card payments is one month of expenses that exceed your ability to pay. Suddenly, you're in debt. Many people feel overwhelmed at the first sign of trouble. After all, how do you pay bills with money you don't have?

Kerry York, executive director of the nonprofit Consumer Credit Counseling Service of New Hampshire and Vermont, says, "Half of our clients who seek debt counseling are new to this type of financial hardship, and they are embarrassed and uncomfortable. The worst thing someone in debt can do is ignore it." Fortunately, there are constructive steps you can take to turn your finances around.

Prioritize.

Organize your bills so you can see exactly how much you owe and who your most important creditors are. Personal debt is confusing enough without having to deal with paper overload. Unless you are crystal-clear about what you owe, it's easy to continue spending money.

Make a solid plan for attacking your debt.

List everything you owe and the corresponding interest rates you are paying. Pay the most important debt first. Then pay off the debt that carries the highest interest rate. What you're aiming to do is eliminate the debt with double-digit interest rates.

Keep only one or two credit cards.

Remember, every time you use a credit card you are in effect borrowing money. The more cards you carry, the more confusion you'll have when it's time to pay your bills, particularly if you forget which credit card you used.

Also, consider asking your credit card company to lower your interest rate, especially if you have a history of paying your bills on time. You'll never know unless you ask.

Make your payments promptly.

Try paying off as much as you possibly can every month. Always pay more than the minimum amount you owe, even if it's a small amount. When you pay a card off entirely, close the account and have a little ceremony as you cut the card in half. The satisfaction is hard to beat. Financial expert, Suze Orman says, "Once out of debt you'll find the pleasure of not creating debt far exceeds the momentary thrill of buying something on credit that you don't really need, can't afford, and won't really care about much beyond the time you get it home."

Cut out luxuries and extra items you can live without.

When tempted to spend money on an item or service you want but may not need, remind yourself of all of your monthly obligations such as mortgage or rent, food, health care and transportation expenses, and the temptation should pass.

If you own a home, look into a home equity loan or line of credit.

You can't borrow your way out of debt, but using an asset like your home is essentially borrowing money from yourself. The interest on a home equity loan or line of credit is generally deductible at income tax time, and you can benefit from the savings.

You should only take out a home equity loan, however, if you are determined to remain debt-free, according to experts. You don't want to run up new debt after you use a home equity loan to pay off the old balance. Since the equity in your home may represent your single largest asset, you might also want to consider refinancing your existing mortgage. There are costs involved, but interest rates are at near-record lows and the overall savings may be worth it.

Borrow from family or friends.

This option makes sense if they can lend you money at a low rate of interest. But more than any other debt-reduction technique, this requires an accurate paper trail to determine how much money you've borrowed and from whom. You will also need to adhere to your agreement. Consider this option only if you are willing to do what it takes to make regular payments until the debt is satisfied.

Renegotiate the terms of your loans with your creditors.

Getting your creditors to rework the terms of your loans is sometimes possible. "Most creditors have heard every sad story in the book and are forced to be pretty hard-hearted," says Mike Whitten, senior counselor at the nonprofit Consumer Credit Counseling Service of Mid-Oregon in Eugene. "Having an impartial third party negotiate for you often gets results. Sometimes creditors will lower the interest rate on a loan just to show support for the debtor and to assure that payments are on time."

Borrow against your life insurance or the savings in your 401(k) account.

Both options offer fast results but carry risk. Again, you are borrowing your own money but with high penalties in case of default. If you borrow against your life insurance and fail to pay your premiums, your policy will lapse. Most 401(k) loans must be paid back within 5 years. If you leave your job before then, you must pay off the entire loan balance at once or you'll pay income taxes and a 10% penalty on the outstanding balance. In addition, your new contributions will be used to reduce the loan, not add to your savings.

Get help.

This sounds simple but most people are not sure where to go when debt has them over a barrel. Professional debt counselors can help you strategize and negotiate lower interest rates. They can also simplify the process of paying down your debt by consolidating your payments into one. This way, your payment is made to the debt-counseling firm, which then disburses it to the various creditors. For information on finding a debt counselor, try nonprofit organizations like the National Foundation for Credit Counseling at www.nfcc.org or GreenPath Debt Solutions at www.greenpath.com.