Getting out of debt

May 21 - Our recent survey found these financial problems concern women most: living within your means, affording health insurance, getting rid of debt, buying a home, and saving for retirement. We looked through our viewer email and found five women who have these money problems. “Today” financial contributor and Money magazine editor-at-large Jean Chatzky has advice on how to get out of debt.

“My money dream is to get out of debt and begin saving toward purchasing a home and investing. Just five years out of college, I can’t seem to lift this ceiling of debt (or even control it) and it’s preventing me from moving forward. Recently, my apartment was robbed and I’ve had to spend quite a bit to replace items taken (such as my computer which I need for work). This enormous unexpected expense has made it even more difficult to get where I want to be. And between student loans, credit cards, personal loans and overdraft, my financial goals seem further away than ever before. Please help.”

— Jihan C., Harlem, NY

ASSESS THE DAMAGE

Interestingly, Jihan never thought she had a debt problem until the burglary, despite the fact that her debt was preventing her from saving and getting ahead in any big way. Credit card debt, in particular, has become such a common thing the way we live today, that many people refuse to acknowledge that they have a problem while the problem is still manageable. I think if you revolve debt on a month to month basis — or if you’ve racked up more with big purchases that you’ll be able to pay off over the next year, it’s a problem you need to tackle. And note: I’m speaking specifically of credit card debt. Student loan, mortgage debt, even car loan debt are other animals entirely.

SAVE FOR PERIODIC EXPENSES

Most get-out-of-debt programs work the same way. You line up all your credit cards, figure out which has the highest interest rate, put all your free cash toward paying off that card and pay the minimums on the rest. When that highest-rate card is paid off, you cut it up and turn to the one with the next highest rate card. In theory, that’s precisely how you should go about paying off credit card debt, with some smartly-conceived interest-rate roulette. In practice, however, life often gets in the way. Big, seemingly-unavoidable, expenses pop up. Things like Christmas, train tickets home, bridesmaid’s gowns and other things she need to pay for occasionally during the year but shouldn’t be floating on a credit card. In order to figure out your periodic expense needs, take a look at your expenses for the past year (use your credit card statements and calendar to help you) and add them up.

THEN FOCUS ON YOUR DEBT

While you’re accumulating your periodic savings, pay the minimums on your credit cards, but try hard not to accumulate new credit card debt. Then, once the account is sufficiently funded, put your muscle toward paying off your credit card debts starting with your highest interest rates and working your way down. (Note: If you are offered the opportunity to transfer your balances to a lower rate card that’s not a bait-and-switch where you get a good rate for a few months which then jumps, it’s always a good idea.)

KEEP ONE CARD, CANCEL THE REST

I’m a big believer in the fact that you need only one (or at the most two) cards in your wallet. It should be a low rate card with a modest monthly fee, and if you’ve had problems managing credit card debt in the past use it gingerly. Charge only what you can pay off each month — and if you find you’re unable to do that, put it away.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2003. All rights reserved. For more financial advice, visit the Money magazine Web site at: www.money.com.