It Pays Off to Pay Off

Denise Trowbridge

The average American family using credit cards is carrying a $15,799 balance, according to the credit-counseling agency Consolidated Credit. The typical Ohioan with student loans graduated with $27,713 in debt. The average new-car loan is $27,000, according to Experian Automotive. The rub: if you're a typical middle-class American with a credit card, a college degree and a car, you're in serious debt, and that isn't even counting the house you live in.

For families, it's too easy to fall into debt. First, kids are expensive, but sometimes we might also be the victims of lifestyle-thinking, such as "if we're middle-class, we should own a home, have two cars and a manicured lawn and go out to dinner," said Cara Hill, a central Ohio division manager for the financial-counseling service Apprisen. All of that, plus things like smartphone data plans, maybe a vacation every year and unexpected car or other expenses, can quickly add up to a life in debt.

When you're stretching your paycheck over a lot of monthly obligations, it can put you in a precarious spot, maybe without enough cushion, and vulnerable to any financial hiccup. "Debt, excluding a mortgage, should never be more than 15 or 20 percent of your budget," said Hill.

If your debt level is higher than that or if you worry about how you are going to pay all of the bills, it's time to come up with a plan to reduce and eventually eliminate debt from your life.

The first step to debt-free is to stop accruing more debt. "Be realistic about what lifestyle you can actually afford," Hill said. "Do you need a TV in every room? Does everyone need a data plan and cell phone? We need to understand there are many ways to be middle-class. We can live comfortably and debt-free, but it might mean not keeping up with the Joneses."

The next step is tracking what you earn and what you're spending. Then, look for places you can cut or reduce. Ask yourself what the five most important things are to you. Shift your spending to support those, then cut in other areas. Make sure your money matches your priorities, and that your goals and plans "are realistic, then take the time and effort to research less expensive options, such as discounts on (phones) or cable," Hill said.

The key is breaking money habits and forming newer, more productive ones. Once you start trying to cut or change your spending habits, "give it at least 60 days. It'll take that long to see the results of your effort," Hill said. "You want to get to a place where you can afford what you have and what you need."

Sticking to a more realistic monthly budget can keep you from acquiring new debt and help you find extra money to pay down the debt you have.

Next, prioritize your debts and make a plan to squash them. Rank debts either by highest to lowest interest rates or lowest to highest balances. A "power-play system, where you either pay off the debt with the highest interest rate or the one with the lowest balance first," works well, Hill said.

Once one debt is eliminated, you take the money you used to send to that creditor and add it to the next monthly debt payment on your list. It's called the "debt snowball" method. As debts get paid off, the monthly payment to the next creditor increases, accelerating payoff.

If you're in a position where you're using a credit card to pay off another debt or are taking out cash advances, your debt might be too big to tackle on your own. At that point, it's important to seek help from a nonprofit credit-counseling agency or possibly a bankruptcy expert.

Paying off debt "is not impossible, but it takes hard work and determination," Hill said. "You have to roll your sleeves up but it will be easer to deal with now than later. It's painful but it's better in the long run."