Escaping Debt

About three years ago the 63-year-old, a retired nurse had racked up about $13,000 in credit card debt. He had a house payment and car payment and so many credit cards he couldn't keep up with everyone he owed. ``I couldn't catch up,'' he said. Finally, with collectors after him, he went to to get help. They put him on a payment plan, helped him cut up his credit cards. And in two years, he paid off his credit card debt. He also saved money and started mutual fund accounts for his grandchildren. ``People don't realize what debt will do to you,'' Mr. Southall said. The non-profit organisation has said that a rash of people have called to get help over the winter holidays, but whether that means more people are in financial trouble or they're less comfortable about their financial situation is hard to tell.

Financial planners are divided on what to do about debt.Most say it is something you don't want to have, although a few say that holding long-term debt -- 30-year home mortgages, for example, can work to your advantage because of inflation and tax minimizing deductions. Buying as home at 1969 prices, for example, is a lot cheaper than getting one at 1999 prices, and deducting mortgage interest over 30 years can have a significant impact on taxes you owe.

TIPS

• Know how much you spend and stick to a budget. Having the discipline to stay within realistic spending limits will save you a lot of pain later. People who know exactly what their buying and how much it costs are less likely to spend money on frivolous things, the experts say.
• Get rid of credit card debt. Credit cards are killers because of the high interest rate -- as much as 21 percent in most areas -- and because credit card companies require a minimum payment that makes paying them off soon unlikely.
• Use credit cards carefully and pay them off. Revolving credit at high interest rates is generally what gets people in trouble, financial advisers say.
• Always pay more than the minimum suggested by the company. When you start adding up how much you pay in interest and fees, ask yourself if what you bought was really worth it. Most financial advisers recommend having only one or two credit cards with balances that are paid off monthly. Any other cards should be cut up.
• No more than 15 to 20 percent of your income should go to credit cards. Pay off either high interest cards or low balance cards first. Basically, there are two systems for paying off credit cards. The first, and more logical, is to pay down the card with the highest interest rate first. The second, is to send payments to the card with the lowest balance. When it gets paid off, move on to the next card. It will give you a psychological boost. No matter which system you use try to send more than the minimum payment. On average, it takes three to four years for most people to pay off their creditors. So don't get discouraged. It takes time to chip away at debt.
• Reduce interest rates. High interest rates eat up payments. There are a several ways to lower them. Move debt on a high-rate credit card to a lower one. Take out a home equity loan or a low-interest consolidation loan to pay off credit card debt. Try to negotiate with creditors. Some may offer you a better interest rate or forgive monthly fees if you ask or explain your situation. They would rather get something back than nothing. Be sure to save. Everyone's situation is different, but make sure you save some money while you whittle down your debt, financial experts say. Take a small amount from your paycheck. Let it build up.