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Wipe out debt for good

By Andrew Housser

The average U.S. household owes more than $7,000 on their credit cards. Average U.S. household mortgage debt is around $154,000, and average U.S. household student loan debt is more than $33,000. Altogether, U.S. consumers have $14 trillion in debt.

A bit of debt is unavoidable for most people. Few people can afford to buy a home or get a college education without the help of loans. Even credit cards (when used responsibly) can be a good thing. A positive credit history helps boost your credit score, which in turn can result in lower interest rates on loans, such as a mortgage or vehicle loan. Problems arise when you accumulate more debt than you can handle. These four keys can help you get out of debt and stay that way for good.

1. Budget. You cannot fully tackle debt until you have a realistic assessment of your current financial situation. How much money are you bringing in each month? How much is going out, and where is it going? Separate your debt into fixed debt (mortgage payment, car payments, student loan payments) and revolving (or changing) debt like credit card debt. Consider using the snowball method to pay off credit card debt. Pay as much as possible toward the smallest total debt while you make minimum payments on all other bills. When you have paid off the first debt, apply those funds to pay off the next smallest debt amount. Continue this pattern until you eliminate all credit card debt.

2. Take charge of credit cards. Closing a credit card account is one way to ensure you are not tempted to rack up debt again. However, closing an account can have a negative effect on your credit score. Leave your accounts open even if you have not used it in ages – especially accounts with a positive payment history. Lenders view borrowers with short credit histories as risky. Instead, take steps to limit your temptation to use credit cards if you cannot pay the monthly balance in full. This may mean freezing the actual cards in a block of ice, placing them in a drawer so you do not have ready access to them when shopping, or shredding them. Of course, you also need to say no when sales clerks offer to open new lines of credit.

3. Change your financial ways. It is important to understand what led you into debt in the first place. Were you unprepared for an emergency like a job loss or health problem? If so, a top priority should be establishing an emergency savings fund. This means saving at least six to nine months’ worth of salary and using it only in a true emergency. Are you an impulse shopper? Do you have extravagant taste? If so, you may need to avoid your favorite stores, or find discount stores that offer affordable deals. Most importantly, you need to commit to the fact that you can only buy things when you have the cash. If a purchase must go on credit -- and you know you cannot pay the bill in full at the end of the month -- then you should leave the store empty-handed, or not step inside in the first place. Some people find it helpful to unsubscribe from email lists, catalogs and even magazines to avoid temptation.

4. Focus on saving, not spending. Once you have addressed your debts, you might find that you actually have money to spare for the first time. This is not an invitation to start spending. Instead, make sure your emergency savings fund is robust. Ensure you are maximizing your retirement contributions. Save interest by paying off your car or student loan faster. Open accounts to set aside money for goals you establish: a vacation, home renovation or plan for the holidays. Then, when the event rolls around, you will not need to reach for credit cards to pay.

On the surface, the process of getting out of debt appears simple: Spend less than you earn and use the leftover money to pay off existing debt without adding to it. In reality, it takes a serious commitment to change your attitude about money and adopt new spending and savings habits. Nevertheless, you will find that the payoff of a debt-free life is worth it. 

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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