How 4 Families Conquered Their Credit Problems

How these savings-challenged families freed up cash—and how you can, too.

Erasing debt on notepad.

Molly Stillman, 27, will never forget how financial panic feels. "Your chest starts to feel hot, your heart's pounding, you get dizzy and nauseous," she says, recalling her realization in 2008 that she owed more than $36,000 on her credit cards. Today, the marketing director from Hillsborough, N.C., is free and clear, and she vows, "I'll never be in debt again."

That's a promise more Americans have been making these days, since the financial crisis and recession shook their sense of wellbeing. A Federal Reserve Board report issued in June revealed that only about 39 percent of card holders carried a balance in 2010, down from 46 percent in 2007, and those balances average $2,600, compared to $3,100 three years earlier. In part, that's a reflection of stingier banks' credit requirements. But it's also the result of a mass awakening among consumers to the fact that paying off debt is one of the only surefire ways to increase disposable income. That's especially true when it comes to credit card debt, often the first recourse for savings-challenged families without much home equity, since it often carries cripplingly high or variable interest rates.

"People forget that when they charge something on a credit card they're in essence decreasing their future income, because they're committing those earnings in advance," says Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling (, a network of more than 700 nonprofit credit counseling agencies that help consumers manage their debt, often by negotiating lower rates from the lenders. Unlike for-profit debt-settlement companies, which charge hefty upfront fees and claim to negotiate lower loan balances with credit card companies (and which were investigated by the Federal Trade Commission in 2010 for misleading practices), nonprofit agencies charge low fees and ensure that the entire debt will be repaid, which helps consumers maintain their credit rating. "The recession's silver lining," says Cunningham, is that many people have "changed their ways." Meet four reformed families:

Christina and Jim Harris

Anchorage, Alaska

Debt: $66,000

For years, Christina and Jim Harris enjoyed a picture-perfect life. Jim's remodeling business brought in about $100,000 a year; Christina, 36, managed the company and raised their three kids, now 8, 12, and 15. Then came the recession. It was "like falling off a cliff," Christina recalls. "Our income basically dropped by half, but we didn't cut back on expenses." By August 2008, their credit card debt stood at more than $50,000 and they found they could no longer make the minimum payments. Some people recommended bankruptcy, recalls Jim, 38, but "we decided we should pay the money back. We're not deadbeats."

"Nobody forced me to buy that $600 Coach bag," Christina says.

The credit counseling service that Christina consulted got the Harrises' lenders to drop rates as high as 32 percent to as low as 7 percent. The couple agreed to make one consolidated payment of $1,400 a month to the agency for four years, which the agency would then dole out to the banks.

[Read: 12 Money Mistakes Almost Everyone Makes.]

Their spending screeched to a halt. "The year before, my kids were in all name-brand clothes," says Christina. For now, they would be limited to one pair of designer jeans each, from eBay or thrift stores. The family did away with cable and Internet, and slashed energy bills by 20 percent by installing programmable thermostats and energy-efficient bulbs and weatherizing doors and windows. They chose a $200 used clothes dryer rather than buy the same model new for $1,200. They shaved $500 off their "over-the-top" holiday gift budget. Later, when they felt they could again splurge on a treat, Jim remodeled a friend's kitchen in return for frequent flyer miles to Hawaii.

Meanwhile, Christina upped the family cash flow by heading back into the workforce after six years at home. Lacking a college degree and recent experience, she took the first job offered—ironically, collecting bills for a doctor's office.