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How to Get Out of Debt and Avoid Debt Reduction Schemes

Written by Christopher Gearon

Want to get out of debt? Conquer your urge to use your credit card. It could save you fromhow to get out of debt drowning in debt.

Financial planner Robin Tull has a client whose boss pays for his service. Tull's mandate is to help the valued employee get out of debt.

Debt Advice
Save for big-ticket items
Avoid "fringe banking"
Forget pawnshop interest
"Debt is something that causes your employees to work harder, but it can also cause distractions," Tull says. The client used his credit and charge cards to rack up thousands of dollars in debt on dining out, buying clothes and borrowing for high-end vehicles. But the debt was exceeding his income and, to top it all off, he was paying those monthly service charges of 18 percent or more.

This is bad debt. "Bad debt is when you don't have an asset to pay [the debt] off," Tull says. People pay for everything from dinner to toys, to clothing and vacations on their credit cards. And once the vacation memories have faded and the toy is in the garbage bin, they are still paying for them.

To avoid falling into this trap, charge only what you can afford to pay off the following month. Don't be lured by the prospect of using low-interest debt options, such as home-equity loans, for extravagant vacations or other unnecessary purchases. This just turns the good debt of an equity loan into a bad or even ugly debt, say financial planners.

Stay away from open-ended credit, such as credit cards or open-ended equity loans where the interest rates and terms can be adjusted. Adjustments are easy to make and can trap you even deeper in debt. This sort of debt accounts for more than 13 percent of Americans' debt, according to the Federal Reserve.

Tull's advice to clients: Save for big-ticket items such as furniture, appliances and cars, instead of taking out loans for the entire amounts. Stay away from "fringe banking," such as come-on checks that arrive in the mail advertising themselves as debt consolidations. Don't even consider paying interest on pawned items and furniture rental.

Interest rates for some of these loans can run 25 percent to 100 percent or more.