1. Americans are loaded with credit-card
The average American household with at least
one credit card has over $8,000 in credit card debt, according
to CardWeb.com, and the average interest rate runs in the
mid- to high teens at any given time.
2. Some debt is good.
Borrowing for a home or college usually makes
good sense. Just make sure you don't borrow more than you
can afford to pay back, and shop around for the best rates.
3. Some debt is bad.
Don't use a credit card to pay for things
you consume quickly, such as meals and vacations, if you can't
afford to pay off your monthly bill in full in a month or
two. There's no faster way to fall into debt. Instead, put
aside some cash each month for these items so you can pay
the bill in full. If there's something you really want but
it's expensive, save for it over a period of weeks or months
before charging it so that you can pay the balance when it's
due and avoid interest charges.
4. Get a handle on your spending.
Most people spend thousands of dollars without
much thought to what they're buying. Write down everything
you spend for a month, cut back on things you don't need,
and start saving the money left over or use it to reduce your
debt more quickly.
5. Pay off your highest-rate debts first.
The key to getting out of debt efficiently
is to first pay down the balances of loans or credit cards
that charge the most interest, while paying at least the minimum
due on all your other debt. Once the high-interest debt is
paid down, tackle the next highest, and so on.
6. Don't fall into the minimum trap.
If you just pay the minimum due on credit-card
bills, you'll barely cover the interest you owe, to say nothing
of the principal. It will take you years to pay off your balance
and potentially you'll end up spending thousands of dollars
more than the original amount you charged.
7. Watch where you borrow.
It may be convenient to borrow against your
home or your 401(k) to pay off debt, but it can be dangerous.
You could lose your home, or fall short of your investing
goals at retirement.
8. Expect the unexpected.
Build a cash cushion worth three months to
six months of living expenses in case of an emergency. If
you don't have an emergency fund, a broken furnace or damaged
car can seriously upset your finances.
9. Don't be so quick to pay down your mortgage.
Don't pour all your cash into paying off a
mortgage if you have other debt. Mortgages tend to have lower
interest rates than other debt, and you may deduct the interest
you pay on the first $1 million of a mortgage loan. (If your
mortgage has a high rate and you want to lower your monthly
payments, consider refinancing.)
10. Get help as soon as you need it.
If you have more debt than you can manage,
get help before your debt breaks your back. There are reputable
debt counseling agencies that may be able to consolidate your
debt and assist you in better managing your finances. But
there are also a lot of disreputable agencies out there.