6 Steps to Dig Out of Debt

How to get out of the red permanently.


Currently, U.S. households owe an astounding $2.3 trillion in non-real estate debt, driving increasing numbers of Americans to turn to experts for help. "It was like an avalanche," says Carole Carroll, who along with her husband, Donald, saw their credit card debt rise to $88,000 after trying to cope with job loss, family obligations, and other financial burdens. The couple, of Queens, N.Y., developed 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.

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Debt can prevent you from buying a home, increase insurance costs, disqualify you when applying for a job, cause marital strife, and spoil future financial growth. In 2006, the Carrolls buckled down to pay off their debt, which they did in less than four years. Here are key steps that experts recommend for getting out of the red permanently:

1. Determine what you owe. "We didn't actually know how much we owed," says Donald Carroll, 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.

2. 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.

3. Drop credit cards. A year before they got married this September, Tracy and Vincent Romano, also from New York City, decided to attack their combined debt of $200,000 from school loans and credit cards. The couple now sticks to cash and debit cards. "I had no self-control," Tracy Romano says ruefully.

[See 10 Ways to Improve Your Finances.]

4. Trim the fat. Track your spending for 30 days, as it could open your eyes. A $3.95 daily specialty coffee during the workweek could cost nearly $28,000 over a 35-year career, says Steve Orr, a financial planner in Victoria, Texas. Investing that money instead could earn you roughly $247,000 at just 3 percent interest over the same period. The Romanos stopped eating out regularly and got a family cellphone plan.

Other hints: 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.

5. Think creatively about bringing in more money. Debt counselors suggest that clients find ways to boost income. Options include taking on overtime shifts, as Tracy Romano does, getting a part-time job, staging a yard sale, or even selling other assets.

[See 10 Ways to Start Earning Extra Money Now.]

6. 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." The Carrolls were elated when they finally emerged from debt and lifted their credit scores from the low 500s to the high 700s.