10 Ways to Get Out — and Stay Out — of Debt

Paying Off Debt, Personal Finance
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By Richard Rosso

Learn more about Richard on NerdWallet’s Ask an Advisor

We have an ongoing love affair with debt.

I observe greater debt awareness since the financial crisis; I also witness my fair share of credit abuse horror stories.

Here are 10 ways to get out of debt and stay out.

1. Denial is dangerous.

You need to be aware a serious debt problem is imminent or exists. Whether it’s due to your own mistakes or others using your credit (which happens more often than you think), debt can rise to dangerous levels in a stealth manner. I’m not sure of the motive behind missing the danger. Perhaps it’s similar to a slow boil – you don’t know you’re in too deep until burned. You must create boundaries around your credit availability, and the first step is to face facts, as painful as they are.

2. Try not to panic.

Panic will prevent you from clear thinking, and you’ll freeze up. Don’t seek assistance yet. You’re on a fact-finding mission. Gather all your credit statements, including those for autos and mortgages.

3. Dig down to the financial foundation.

It’s the moment of money truth. The numbers may be shocking, yet you must go right down to your household dollar DNA. Prepare a written list of each creditor along with current balances, payments and months late (if applicable). Sum the balances. Next, list all your monthly sources of income – gross and net of taxes (most likely from your household pay stubs). Now move forward and use the Consumer Debt Accounts Worksheet. One of my favorites is at Budget Worksheets.

4. Devise a battle plan.

Prepare to fight on three fronts.

Emotional: Dig into the motivation behind overspending. Excessive spending usually is a sign of emotional or behavioral challenges.

Mental: Maintain mental endurance and patience; positively acknowledge progress along the way. The task won’t be easy, but with each action step you will feel in greater control.

Financial: Close the credit cards you use infrequently and begin investigating ideas to free up cash. Discover ways to make the illiquid, liquid. For example, sell assets you no longer need. The feeling of freedom from “stuff” will motivate you to increase the number of the items you seek to sell to decrease debt. As a client said recently, “I feel 20% lighter,” after paying off and closing a credit card with a 20% interest rate.

5. Think debt consolidation first.

Consolidation is a multistep attack. The objective is to take high interest rate debts and combine them into one or several loans with much lower interest charges and lower payments. You can accomplish debt consolidation on your own or with the assistance of a spouse, significant other or knowledgeable financial advisor.

A debt consolidation service is not required if your credit score is 650 or higher. If you decide on this route, a debt consolidator should be non-profit (request a certificate that proves the organization is a 501(c)(3) operation), rated highly as a member of the Better Business Bureau and will not charge excessive fees upfront.

Check out the Federal Trade Commission’s Guide to Choosing a Credit Counselor for important consumer information and questions to ask before deciding. Be sensitive to the terms of a consolidation loan. For example, a lower interest rate and payment may not be a the best solution if the length of the loan is so long that you wind up not saving much in interest charges at all.

6. Take action.

Contact each credit card provider and negotiate a lower interest rate. You may be surprised by how cooperative lenders are, especially if you’re long-term customer. Second, consider a home equity line of credit or loan to consolidate debt. Of course, you must have equity in your home, and the process may include closing costs. There’s danger of placing your primary residence at risk if you’re delinquent on payments. If you’re responsible, there are advantages including a possible tax deduction and attractive interest rates.

7. Avoid debt settlement organizations.

Debt settlement companies work directly with creditors to negotiate attractive terms or charge offs. It sounds good in theory, but there are several disadvantages. Expensive fees, creditors who can be reluctant to deal with a settlement company and advice like no longer paying your debts can result in heavy penalties and make a bad situation worse. It’s best to call creditors on your own and negotiate.

8. Think outside the box.

An industry of efficient private companies has emerged called peer lenders. No, they don’t offer rates as lows as banks; they’re not as difficult to deal with either, as minimum paperwork to obtain funding is required. Depending on your credit score, personal loans up to $35,000 are available at attractive rates. Apply online in minutes; a one-time fee of 1% to 5% of the loan amount is charged if your loan is accepted. The better your credit score, the lower the fee. One of the largest peer lending groups is Lending Club.

9. Find an accountability partner.

Share your situation with an objective third party. Schedule monthly progress meetings to ensure you remain on track. From experience, I know it can take years for credit card debt to be paid off. It’s important to have an accountability partner who can help you stay focused.

10. Once out, stay out.

Remaining debt-free and managing debt wisely is ongoing. Keep a diary to document challenges and accomplishments. If you feel the need to take on debt again, read through and relive those times you went through to achieve freedom from debt, today.

The temptation of taking on debt is everywhere. Eliminating it will reduce stress and allow you better choices for your cash.