By Terry Savage
MSN Money

The recession may be over -- or it may have been so brief that it didn’t officially qualify as a recession in spite of all the official pronouncements. But whatever the statistics say, many American families still find themselves in a personal financial recession.

Americans are declaring bankruptcy at record rates, with one in every 100 families affected by a bankruptcy. Though the stigma has diminished, the effects linger, touching your life in unexpected ways. For example, many prospective employers will pull a credit report as a character reference.

If you’re overwhelmed with debt, the economy is giving you some breathing room now. Take advantage of the upturn to liquidate your debt. The next time around, you might not have this opportunity. There’s still a push in Congress for more stringent bankruptcy legislation. And if interest rates start to rise, the burden of variable-rate credit cards and mortgages will become heavier to bear.

Americans are now carrying $683 billion in revolving credit card debt. That’s not the amount we charge every month; it’s the outstanding unpaid balances on which people pay interest. And, according to a report by Cambridge Consumer Credit Index, 47% of the people who paid less than the full amount on their credit card bills in a recent month, made only the minimum payment due. In fact, only 13% of Americans with an outstanding balance could afford to pay more than half the balance.

Pay now, or pay and pay and pay later
Not paying off the debt is a strategy that will bury you in interest charges. The way some companies calculate the required minimum payments, it could take you as long as 30 years to pay off your original purchase. And along the way, you’ll pay four times the original charge in finance charges.

Surely the purchase that seems so important this month isn’t worth a lifetime of indebtedness. The couch that is so attractive today will likely be long gone in 30 years. Vacation memories and photos will be faded if you’re just paying off that hotel bill in three decades. And a meal charged today is down the drain before the bill even arrives.

It’s time to rein in that debt and do something about paying it down. Here are seven steps you can take to get your debt under control:

Step No. 1: Make a list of what you owe. This first step may be the hardest part of dealing with your debt. Put all your bills in a pile. Then list your debts in order, starting with the largest balance first. Next to the amount, list the minimum monthly payment, and the interest rate you’re paying on that card. Now you know where you stand.

Step No. 2: Prioritize your repayments. If you have one or two small balances, you might want to apply extra money to pay them off, while continuing to pay the minimums on the cards with larger balances. Or you might want to pay off the card with the highest interest rate first.

When you’ve paid off the smaller balances, attack the larger ones. Here’s a trick that can save you years of interest charges. Simply double the minimum monthly payment -- and don’t charge another penny. That should get you out of debt in less than three years.
You can also use the debt evaluation tool at MSN Money. It will help you evaluate your situation and prioritize your payments.

Step No. 3: Eliminate credit cards and don’t roll over balances. When you pay off a card, notify the company that you want to close the account. Don’t just stick the card back in your wallet where it will tempt you again.

And don’t roll balances from card to card. This is a tempting way to make yourself believe that you’re doing something about your debt problem, if only by lowering the interest rate you’re paying. Switching from card to card has drawbacks. Every time you get a new card, you’re generating an outstanding open credit line that will appear on your credit report. Other lenders may be unwilling to let you keep rolling balances. And when those tempting introductory rates expire, you could be stuck with huge balances on high rate cards.

Step No. 4: Get a copy of your credit report and credit score -- and study both carefully. Your credit report is simply a compilation of your bill-paying history. Don’t hide from the truth. There may be some errors on your credit report that you’ll want to correct by contacting merchants. And if you do make progress toward paying down your balances, you’ll want to make sure they’re correctly reported.

You’re entitled to a free copy of your credit report if you’ve been turned down for a loan or a credit card. And there are many Web sites that offer a report for under $10 -- or even for free, if you sign up for a credit monitoring service that you might not need.

Your credit score is a different, more complex evaluation of your creditworthiness. Your credit score doesn’t just report your payment history; it uses a formula that assigns a weigh to factors such as bill repayment habits, percent of available credit used, and even your employment history. This credit score is used in almost every mortgage decision, and may be used in one form or another when pricing life or homeowner's insurance or car loans.

The most frequently used version of the credit score is the FICO score created by Fair Isaac & Co., the company that pioneered the concept of scoring. A FICO score ranges between 300 and 850. About 39% of the population scores above 750 -- and a score below that level is a warning signal.

Some aspects of your credit report are beyond your immediate control. They’re calculations based on the length of time you’ve had the same accounts open. But other factors in your credit score that weigh heavily are your timely bill-paying habits and the percentage of your credit limit that you are using on each card.

You can get a copy of your Equifax credit report and your FICO score at myFICO.com or you can click here on MSN Money. The cost is $12.95 -- and it includes online access so you can track any changes in your credit report.

And by 2005 you should be able to get credit reports for free. The Fair and Accurate Credit Transactions Act, signed into law by Congress in Dec. 2003, gives every American the right to a free credit report every year from each of the three major credit bureaus: Equifax, Experian and TransUnion. But it will take a while for the government to write the exact regulations for the freebies and more months for the companies to comply.

Step No. 5: Make a spending plan. Now’s the time to change your free-spending ways. To do that, track the money that’s coming in and going out. Fortunately, there are easy ways to do that. One thing worth spending money on is personal finance software such as Microsoft Money and Quicken. Both programs let you track all your check writing by category and make monthly comparisons of your actual spending to the amount you’ve budgeted.

Use a debit card instead of your credit card. Then, when you download your bank transactions into your Quicken or Money program, all of your debit transactions will be included, and can be easily categorized. (If you’re not paying bills online, you’ll need to keep the receipts and enter them into your checkbook and your budget plan.) Your bank ATM card is a debit card if it carries the Visa or MasterCard logo. You won’t earn points for your purchases, but you won’t run up bills that have to be paid at the end of the month. You can only use the card if you have money in your account!

Step No. 6: Be careful about the equity in your home. In the past few years, Americans have withdrawn billions of dollars worth of equity in their homes. The ads and commercials are tempting, because the rates on home equity loans are typically lower than the rates charged on outstanding credit card balances. And the interest on a home equity loan may be deductible.

But there are dangers in home equity loans. Frequently, the money is used to pay down credit cards, which are then charged up again. The banking industry has a term for it: reloading.

Be very careful about digging into this last reserve. Yes, home values have been rising 5% to 6% a year in recent years, according to data from the National Association of Realtors. But there’s no guarantee that home prices will continue to rise at the current pace. And if you have future problems that require cash, you’ll have no place to turn. Instead, you’re putting your house on the line.

Step No. 7: Get help. Sometimes credit problems are easily attacked once you’ve faced up to them. But for some people, the problem of overspending is a psychological one. Spending can become a habit that’s as difficult to kick as alcohol, drugs or gambling. And then there are those who are over their head in debt because of circumstances they truly could not avoid: medical bills or divorce or loss of a job.

In those cases, it’s wise to seek help from professionals. The only problem is that there are so many advertisements for “credit counseling” that you can’t be sure whether they’re rip-offs. I’d suggest you stick with one of the national, non-profit credit counseling services such as Consumer Credit Counseling Services.

Many people are afraid that just one visit will be reported to the credit bureaus and make their problems even worse. That’s not the case. You can talk with a credit counselor on a private basis. Only if you enter their debt repayment program, where they contact your creditors and arrange for lower payments or interest rates, does this relationship appear on your credit report.

Another excellent source of advice and assistance is Myvesta, formerly Debt Counselors of America, a nonprofit financial crisis center. (See link at left.) Myvesta offers individualized counseling, a debt management service, advice on avoiding bankruptcy and foreclosure, and even counseling for families buried in debt. This is another source you can trust completely. Of course, all the counseling and advice in the world is useless without your own personal determination to deal with your debt.

The bottom line
If you’ve taken these seven steps, you should be able to work your way out of debt and toward a brighter future. It will take time and lots of self-discipline. It’s worth the effort.

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