A financial cleanse: dealing with debt

Much like physical health, if you want to achieve financial wellness, you need to remove the toxins from your life. When it comes to your finances, that means dealing with debt.

Owing money for past purchases hamstrings your future. Accumulating interest eats away at your income.

An analysis of household debt at NerdWallet.com shows Americans owe the most on mortgages, and an increasing amount on student loans. Credit cards are the third-largest source of household debt.

But in most cases, that’s the debt you should tackle first, as it’s more likely to fall into that “toxic” category. Interest rates are typically higher. There are no tax deductions, as is the case for mortgages or student loan interest.

Also, the smaller balances mean you can get rid of that debt faster – allowing you to then snowball your payments toward that student loan debt, and lastly, your mortgage.

NerdWallet’s analysis shows 46.7 percent of U.S. households have a credit card balance. The average U.S. household credit card debt is $15,252 among households that owe money. Spread across all households, that number drops to $7,115. And the median debt (the amount in the middle) for indebted households is $3,300 in consumer debt, a very manageable figure.

If you’re ready to deal with your debt, here are some tips for tackling credit card debt:

  • Balance your budget. It’s Adulthood 101. You’ve got to live within your means. You’ll never stop the debt cycle unless the money going out is more than or equal to the money coming in. You’ve got two choices: reduce your expenses or increase your income.
  • Stop using your cards. You can’t pay down debt while also racking it up. Plus, if you carry a balance on your cards, your grace period – the time from you make the purchase and that purchase starts accruing interest – goes away. That means you’re charged interest on new purchases right away, increasing the cost of everything you buy.You don’t necessarily need to close the account (unless that’s the only way you’ll keep your fingers out of the credit cookie jar). Just cut up the card, lock it up or freeze it in a block of ice, whatever it takes to stop using it.
  • Pay more than the minimum. That minimum payment you owe your credit card is just that: a minimum. Depending on your interest rate, that amount may not even cover the interest you’re accruing, meaning you’d never actually pay off the card.If you’ve got debt on several cards, focus extra payments on one balance until it’s paid off. Most financial experts would tell you to pay more on the card with the highest interest rate first. An alternate tactic is to pay off the smallest balance first.
  • Call your credit card companies. If you’re in over your head, credit card companies may be willing to work with you, for example, by reducing your interest rate. They’d rather get something than nothing. You need to ask, though.Another option to reduce your interest rates is to transfer your balance to a lower-rate card. Read all the fine print, though. Balance transfer fees could eat away all your savings. That low interest rate could expire quickly, leaving you with an even higher rate.
  • Seek debt management – not debt consolidation. Financial guru Suze Orman does a great job distinguishing between the two options.Debt consolidation companies will tell you to stop paying your credit cards and will ask for payment upfront, as well as a percentage of the discount they negotiate for you. It ruins your FICO score. Don’t go this route.Rather, talk to someone with a debt management organization. These agencies can help you look at your financial situation and get you on a plan to pay off your creditors in three to five years. Their services cost you very little. One example locally is The Village Family Service Center. You can find other reputable services at www.aiccca.org or www.nfcc.org.

    Sherri Richards is a thrifty mom of two and Business Editor of The Forum. She can be reached at srichards@forumcomm.com