Pay Off Debt and Recover in 3 Easy Steps

Use this guide to start the New Year with less debt and smarter spending habits.

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You've finally had enough with your debt problems. You've let the issue sit far too long and all you've gotten out of the deal is misery, late fees, finance charges, and a large debt. You're ready to make a change, but you don't know where to start. Here is a basic three-step plan to help you pay off and recover from your debt problems.

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Stop the Bleeding

If you're tired of your growing debt problem this is the first step to recovery. You must stop the bleeding before you can begin paying off your credit cards or making any significant progress. The most committed plan you could come up with will not put a dent in your debt if you continue to spend, spend, spend.

So to start you must cut off the problem. Cut up your credit cards or throw them in a shredder. Get a friend involved to hold you accountable on your spending. Don't just promise to not spend more. Commit to a spending freeze with real life consequences for breaking the rules. Only once the bleeding has been stopped will you be able to move on. Otherwise you are just spinning your wheels and will never reach success.

Compress and Apply Pressure

It's time to stabilize the patient. You've cut off additional spending, but that will only carry you so far. Now it is time to improve your financial situation further by squeezing additional dollars out of your budget. Your credit card debt isn't going to go away on its own just because you stopped spending with the card. If you're not sure where the money seems to go every month a spending review will make it clear as day.

Create a budget if you don't have one and analyze the last three months of your spending. Prepare for some painful realizations when you do this. A clearer picture will appear of where you're spending money you can't afford to spend, and where you are splurging. Either cut back in those categories or remove them completely from your budget. You're putting pressure on yourself, and even though it hurts it is in your long term interest to bear it. Those extra dollars that you sacrifice from your budget should go directly toward your debt.

You can pay off the highest interest rate card first or the lowest balance. Paying down the higher interest rate card is mathematically the best solution, but if knocking out low balance cards first gives you motivation to continue then by all means do that. This step can take a while depending on how big of a debt hole you got yourself into. Keep working, keep squeezing, and you'll make it out eventually.

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Heal, Recover, and Remember

A congratulations and brief celebration is in order once you reach the third step. You are now officially unique in that you no longer carry consumer debt—not many people can say that. At this point you can consider letting up a little bit of pressure, but don't put yourself at risk of going back to your old ways. Those extra dollars there were paying off debt now need to be building up your savings and emergency fund. Being in debt (and subsequently freaking out about it) can be a scary experience. That can be good or bad depending on how far you take it. It is always fine to have a healthy aversion to debt and credit cards.

Remember that credit cards are tools. The card doesn't swipe itself at the register, the owner of the card does. If you're comfortable with it you can consider keeping a card on hand to use sparingly to repair your credit score. Paying off your balance in full every month for months on end will have a great impact on your score. Just make sure you don't slip back to your indebted ways.

Pinyo is the owner of Moolanomy Personal Finance Blog, which covers a wide range of personal finance  and investing topics, with features that include reviews, comparison guides, and Q&A sections.