Four Ways to Get Out of Debt

Debt can build up over time without anyone noticing. First there's a credit card and a mortgage, then a car loan. Before you know it, you can't pay your monthly bills. If you're feeling "out of shape" when it comes to credit, here are some ways to end your cycle of debt.

Debt is a lot like weight. Most people want to lose a little so they feel healthier. Unfortunately, in spite of their best efforts, it's hard to shake off those "holiday pounds" on their credit cards. Weight loss takes discipline to watch what one eats and to exercise. Similarly, debt reduction requires that you watch what you spend, which begins with portion control.

Spend less

Eating at restaurants twice a day won't help a diet (nor will it help a budget). Similarly, if you pay down your credit cards a little each month, but spend the same amount for new purchases, you won't lose your debt weight. The trick, instead, is to pay off more than you spend. You might want to consider "hiding the candy" by asking someone else to hold your credit cards for you until you've eliminated your debt.

Pay down high interest

Borrowing money comes with a high price: interest rates. These vary from one type of debt to another, but usually your mortgage rate isn't as high as interest on your credit cards or car loan. To reduce your debt, pay off the item with the highest interest rate first. Then, work on the next highest until you're debt free.

Cash is king

It may seem counter-intuitive, but cashing in your savings, CDs, and 401(k) to pay off debt is sometimes a very smart idea. Here's why: If you're lucky and invest aggressively, you'll probably average a 4 to 5 percent return (savings/CDs), or a 9 to 12 percent return (stocks) over time from this money. But your credit cards are costing you 18 percent or more during the same period. (When you factor in inflation, the story gets even worse.) It's better to take the hit now and pay down the debt.

Consider debt consolidation

Another method to reduce debt is to take a debt consolidation loan and move all your indebtedness into a single loan with a lower interest rate. If you have equity in your home, you can use a home equity line of credit (HELOC), or a home mortgage refinance. Another debt consolidation trick is to use a balance transfer card. But be careful-if you can't pay off the balance when the promotional rate becomes due, you may be in deeper debt than when you started.

Gaining a trim physique requires the discipline of dieting and exercise. Gaining a debt-free life requires the discipline to trim your debt load and build muscle to control spending. If you follow the above tips, you can transform your credit situation from flabby to fit.