Seven tips for overcoming debt

By Cheri Doak
    The average American today carries $8,000 in credit card debt. This doesn’t even factor in student loans, mortgages, car payments, utility expenses and grocery bills. In fact, today’s consumer has an average of 13 active credit obligations (revolving and nonrevolving) on record with the credit bureaus. That’s a lot of debt.
    Here’s the silver lining. If you use a consistent approach to making payments and drawing a hard line-to spend less than you earn — you can reduce your debt. Here are seven tips to help you do it.
• Evaluate your spending. Let’s face it. Most Americans have credit cards. Credit cards are not bad. However, most Americans also have credit card debt, which is bad. Add to that student, car and home loans; insurance, utilities and taxes; dining out; gifts for friends and family; a coffee or two; charity; and all of the little extras in addition to monthly bills and you can see why it is easy to fall behind. So the first step to getting out of debt is to prioritize your spending. Do you really need the “extras”? For example, you need to pay rent or mortgage, but do you need that nice new pair of shoes or the yummy chi latte? If you don’t need it, don’t buy it. Put on hold all unnecessary spending until you get your finances in order.
• Create a budget. Don’t spend a dollar unless you have it to spend. To get out of debt you need a plan and discipline, which begins with spending less than you make. So add up all of your expenses and figure out your monthly income. You need to come out ahead.
• Develop a debt elimination plan. You got yourself into this debt; you can get yourself out of it. Sure, it may take some behavioral changes, but if you have a budget you can have a plan. For example, one approach is to start small. Make minimum payments on all but your lowest balance bill. Tackle it aggressively. Once it is paid off, move to the next lowest debt obligation. The idea is to bite off chewable-sized chunks so that you can make progress and stay motivated. Each time you pay off a debt, apply the money you were paying for that debt to a new debt. You will soon find yourself making sizable payments on your most sizable debt. Another approach is to tackle your highest interest rate debt first. Neither is right or wrong. The key is to have a plan and to stick with it.
• Stop using credit cards. If you’re in debt, remove the variable that helps you accrue it even more-credit cards. Cut them up or at least take them out of your wallet. Keep one primary card for emergencies only. Use cash-or your debit card-for everything else. If you have to use your credit card, make sure you pay off the balance in full each month to avoid interest and fees.
• Build an emergency fund. This may seem difficult, but it is essential. If you want to stop relying on credit cards to bail you out when you have an emergency and ultimately be debt free, you need to have a cash fund you can draw from. You can do this by putting any extra income you have at the end of each month into a savings account. Every little bit helps.
• Avoid quick fixes. There’s a saying. Quick fixes do not fix. Debt consolidation may feel quick and easy, but what it really does is provide immediate relief by spreading the pain out over a longer period of time at an often-higher price. Essentially, it’s a loan to pay off your loans. So ask yourself: do you really want to be paying for a $40 dinner or $85 pair of shoes over the course of five years? Before you jump into a debt consolidation program, consult with your banker or a reputable credit counselor. They may be able to help you define an alternative way to eliminate your debt in a time frame that works for you.
• Earn more money. Do you have any extra time on your hands? If you can find a few extra hours in your day or week you can pick up part-time work, an extra shift, or work additional hours from home. Any additional income you earn should be applied directly to your debt.
    The important thing to remember is that as overwhelming as your debt may seem, you can overcome it and rebuild your financial life. And while the path to recovery may be easier for some than others, if you begin to adopt the value that you cannot spend more than you earn you can break your cycle of debt.
    Cheri Doak of Caribou is senior vice president and retail banking leader at Key Bank in Maine. She can be reached at (207) 764-9425 or cheri_doak@keybank.com.