Steps to climb out of debt

For those sinking in a flood of unpaid loans, don't lose hope. Many people have gone before you and made it out. Simply put, there are debt-defying actions you can take.

Most involve budgeting. Write down all your sources of income, expenses, and debt. Then create a budget tight enough so you have money left over to pay down your debts. If your credit cards lead to impulse purchases, cut them up!

But it's easier said than done.

Dave Ramsey, host of a daily money-makeover radio show, says that many people who call in want an easy, instant solution. His first advice is to drop that notion and get ready to make sacrifices.

"We live in a microwave culture, and the answer to this issue is not microwave, it's crockpot," he says.

The best start might be to find a source of inspiration. Focus on an unselfish goal that you can reach after conquering your debt - perhaps paying for a child's college tuition. Or find friends or a group such as Debtors Anonymous to support you through the process.

Once motivated, Mr. Ramsey recommends the "debt snowball" approach: List all your debts, excluding a home mortgage. Then take drastic measures, including selling big-ticket items you don't really need, to pay off the smallest debt as quickly as possible. Meanwhile, pay just the minimum on other debts, he says. After the first one is paid off, you have more resources to tackle the second, the third, and so on. Your results will quickly snowball, he says, and that will enable you to keep at it.

Other experts say it's best to reason mathematically. "It makes more financial sense to prioritize according to highest interest rate," says Pam Little, editor in chief of WomensWallStreet.com. So the debt with the highest rate gets paid first.

Another solution: Negotiate with credit-card companies to see if they will match offers for lower rates. Fifty consumers did that for a study by the US Public Interest Research Group in 2002, and just over half of the companies cut their rates by an average of more than 30 percent.

Using home-equity lines of credit to pay off credit-card balances can also be a good move, but Ms. Little cautions against doing that until you are sure you won't accrue more credit-card debt.

"People who get themselves into an exorbitant amount of debt need to change the way they think about debt before they tap into any other sources," she says.

If your debts are severe, you may want the help of a credit-counseling service. But do your homework before choosing one. Reputable nonprofit agencies offer financial education and budget counseling. If your situation warrants it, they will propose a debt-management plan in which they negotiate with your creditors to reduce or eliminate interest charges. You make one payment a month, which the agency distributes to your creditors. Be sure to keep track that the agency sends the payments promptly.

The credit-counseling industry has ballooned in recent years, and it's under scrutiny by the Internal Revenue Service and lawmakers because some agencies abuse their nonprofit status. For instance, they might pressure people into debt- management plans and offer no other options because much of their income comes from creditors paying them a small percentage of the dollars they recoup.

In 2002, the Better Business Bureau (BBB) received 1,480 complaints about credit-counseling services, up from 261 in 1998, according to a report by the National Consumer Law Center (NCLC) and the Consumer Federation of America.

Some credit-counseling trade associations require members to maintain standards for training their staff and disclosing information to consumers. But Deanne Loonin of the NCLC says the enforcement is not always sufficient.

"We suggest that you approach all agencies with the same questions and the same caution," she says.

In addition to checking with the local BBB, contact your state attorney general's office to see if any agencies are the subject of legal action.

Be sure to ask the agency for written quotes of its fees. Experts say it's reasonable for debt-management enrollment to cost up to $50, plus a monthly fee of perhaps $15. But some agencies try to charge a month or more of your debt payment up front as a fee.

Before you enroll, experts recommend finding out how doing so might affect your future ability to get credit. The main credit-scoring company, FICO, says that participation will not negatively affect someone's credit scores. But depending on your situation, individual creditors might view it as a negative factor.

Whatever practical steps you take, staying motivated is the real key, Ramsey says.

When listeners call back to declare they are debt free, he says, "we play that 'Braveheart' clip from Mel Gibson - 'Freedom!' - and we go a little wild.... That atmosphere creates some positive peer pressure, and it basically sells hope. And, man, when you believe you can do something, you can run through a wall."

These organizations offer help on various debt-reduction strategies. For information on credit-counseling agencies:

• National Consumer Law Center, www.nclc.org or 617-542-8010.

• Federal Trade Commission, www.ftc.gov (follow links for "consumers" and "credit").

• National Foundation for Credit Counseling (a trade association), www.nfcc.org or 800-388-2227.

• Association of Independent Consumer Credit Counseling Agencies, www.aiccca.org or 800-450-1794.

For information on Debtors Anonymous:

• Debtors Anonymous General Service Office; PO Box 920888; Needham, MA 02492; www.debtorsanonymous.org or 781-453-2743.

For information on compulsive shopping: www.stoppingovershopping.com

For information on financial literacy:

www.sharesavespend.com, a website run by Nathan Dungan, a financial adviser and author.