Dig Yourself Out of Debt

The new year is a wonderful time to make a fresh start—but that can be difficult if you're still trying to pay for everything you did in the last year. If you feel buried in debt, there is a way out. Financial experts Jean Chatzky, David Bach and Glinda Bridgforth suggest steps to crawl out of the hole and breathe easier this year.

 Assess your money situation
To get rid of debt and get yourself on the road to repayment, Jean Chatzky, David Bach and Glinda Bridgforth all agree that it is crucial to know how much debt you're carrying and at what interest rates. Pull out all your bills and write a list to determine how much debt you really have. Once you know your total debt, you can start paying it down!

It's very important to know your credit score. Once you start paying down your debt, your credit score will rise. A higher credit score means lower interest rates.

You can get one free report each year from each of the three credit bureaus—so three total. The smart thing to do is to get one every four months, that way you can make sure (for free) that you haven't been a victim of ID theft. To get a free report, go to the website set up by the Federal Trade Commission,

If you can't get a free report, buy one from one of the three credit-reporting agencies:
  • Equifax: 888-766-0008 or
  • Experian: 888-397-3742
  • TransUnion: 800-680-7289 or

Prioritize Payments
Necessities first: These are the things that you absolutely need to live. You need your house, so it's important to pay the mortgage or rent. You need it to be warm in the winter and lit year-round, so it's key to pay the utility company. You need a phone, so Ma Bell gets paid. You need transportation to work, so you make the car payment. If you owe child support, it's a must to pay not only because that's part of being a good parent, but because not paying can get you thrown in jail. And finally, because getting in to see the doctor these days—particularly if you have no health insurance—requires paying the bill then and there, you take care of medical emergencies.

Uncle Sam second: If you have the money to pay your taxes immediately, the IRS will generally work with you to come up with a schedule of payments. By all means, though, file your taxes when they are due. Not filing can result in penalties and interest of up to 25 percent of what you owe.

Most student loans are backed by the government. That means that, like back taxes, the government is allowed to come after these loans in a way that other creditors aren't. If you're delinquent in paying your back taxes or student loans, the government can seize your tax refunds and garnish your wages and, in some cases, your Social Security benefits. Fortunately, the government also has a number of solutions for people who can't afford to make their student loan payments, including putting those loans on hold if you're out of work or stretching out (and thereby reducing) the amount owed.

Everything else third: All of your other debts—bank-card debt, department store debts, payments for furniture and appliances—are backburner debts. That doesn't mean you shouldn't pay them. You borrowed the money; of course, you should try to pay them. But if you're in a situation where you know that not every creditor is going to get paid, these are the ones you put on hold.

Find Extra Money To Pay Down Your Debts
Now that you know how much debt you have, you need to find out where your money is going! Every day, you may be needlessly spending money on little things that you could be using to pay down your debt. Use these ideas to find extra cash!

Pay down your credit cards
The key to getting out from under credit card debt is to pay more than your minimum payment. For example, if you owe $8,000 on a credit card that has a 16% interest rate, you can dramatically reduce the amount of time it will take to repay the debt by raising your monthly payment. If you pay the minimum of $160 per month (assuming the minimum is 2% of the balance), it could take you 30 years to repay the debt. But if you raise the payment to $300 per month, or $10 per day, you can pay off the card in about three years.

Another way to save money on credit cards is to reduce your interest rate. Go to a website or to look at competitive offers. Before you switch your debt to one of the low interest rate cards call your current credit card company and ask to have your rate lowered.

Stop Spending
The quickest way to get yourself back on the right path is to stop spending. Use these suggestions to help cut back so you can move forward!
  • Don't carry credit cards in your purse (only debit/ATM)
  • Write checks, pay cash
  • Turn down credit line increases
  • Create specific funds for special occasions, like holiday presents, vacations, anniversaries, etc.
  • Tell friends what you're trying to do to rally support
  • Don't run up bills you can't pay in full at the end of the month
  • Pay credit card bills on time to avoid late fees
  • Make no more than one ATM visit a week
  • Don't be seduced by credit card offers such as airline miles

Create a Monthly Spending Plan
You have a choice in how you spend your money, so having a spending plan in place is always proactive and empowering. A new spending plan should be developed for each month, detailing your estimated monthly expenditures. It should be completed 15 days before the month starts. By following this timeline, if you have a shortfall—more money going out than coming in—you will have time to cut expenses or generate additional income.

Remember, fine-tuning your spending plan is a process. If the plan you put in place for one month doesn't work, it doesn't mean you should quit. It means you should continue to tweak the plan and figure out how to make it work to accomplish your goals. Plus, doing this exercise will inevitably make you more conscious of how you choose to spend your money and how motivated you are to pay down your debt.

Take Steps to Grow Your Income
If you haven't been able to free up enough money to start repaying your debts in a big way, you have some choices. You can consider whether the big-ticket items in your life—your home, your cars, private schools—are truly necessary. Downsizing to a smaller home, going car-less or putting your children in public schools can save some major money.

You can go through your home and your possessions and see if there's anything of value to sell. Which could you part with if it meant financial security? Your boat? Second car? Second home? Time share? Art or jewelry? To get the most for whatever you're selling, you need to know what it's worth. If it's truly valuable (think $5,000 or more) you should have it appraised for your sake and for tax purposes. If it's a household item that's not worth having appraised, you can get an accurate idea of fair market value by seeing what similar items are selling for through classified advertisements or on eBay. If you find you have nothing big of value but lots of little things to sell, there's a solution as American as apple pie—a garage sale.

You can earn more money, either on your current job or—more likely—by taking on a second one. If it's been a year or more since you received a raise, it's time to ask for one. If you don't get it, ask your supervisor what you need to do to increase the size of your paycheck. You may need to get a second job. Eight and a half million Americans have already done so to meet regular household expenses or pay off debt, according to the Bureau of Labor Statistics. That's 4 out of 10 people! If you're already moonlighting and it's been a while since you raised your rates or raised your prices, do so today by 10%. That's the easiest way to pad your pocket.

Boost Your Credit Score
The higher your credit score, the lower you can reduce the interest rates you're paying to all of your creditors—mortgage lenders, auto lenders, credit card companies. If you're in debt, then servicing those debts takes a big chunk out of your monthly nut. A high credit score can make that chunk as small as possible.

And because what it really is, for lack of a better description, is a snapshot of your borrowing and bill-paying behavior over the previous 24 months, as time goes by you have the power to change it for the better.

35% of your score is based upon how well you pay your bills.

30% of your score is a measure of how much credit you have available to you and how much of that credit you're using.

10% is based on your search for new credit—how recently have you opened (or inquired about opening) new accounts?

10% is the composition of your file. What percentage of your file is bankcard debt and what percentage is installment debt?

15% is a measure of the length of your credit relationships. How long have you had the cards in your wallet?

Advice on raising your credit score