Solutions for Cleaning Up Debt

Debt is the cause of worry and anxiety for a large number of Americans. Like most problems related to finances, it can create tension between couples and make for an unpleasant home life. However, knowledgeable financial advisers have developed easy-to-follow plans to help people clean up and eliminate their debt.

Debt Snowball Plan

Financial counselor Dave Ramsey dispels the myth that the debt carrying the highest interest rate should be paid off first to quickly eliminate debt. Instead, Ramsey suggests that the smallest debt be paid off first to build momentum in what he calls on his website a "debt snowball." Ramsey says "personal finance is 20 percent head knowledge and 80 percent behavior...When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction."

Ramsey's advice is to accumulate $1,000 in a cash savings account in case of unexpected costs and then to list in order all debts, with the exception of a mortgage, from smallest to largest. Pay off as much as possible of the smallest debt each month, while only making minimum payments on all other debts. When that first debt is paid off, begin making larger payments on the next smallest debt until all debt is eliminated.

Credit Card Debt

Suze Orman, another well-known financial adviser, suggests more radical solutions for cleaning up credit card debt. Orman suggests on her website that the first thing you must do is cut up all credit cards. Save one emergency card that should not be carried in a wallet. Then, make payments each month that are as large as you can afford. Orman suggests negotiating the best credit card interest rates, even if that means switching credit cards a few times a year until all of the credit card debt has been paid off.

If you lack willpower or feel overwhelmed, Orman advises calling a nonprofit agency, such as the Consumer Credit Counseling Service, which can help with the organization and consolidation of debt.

Downside of Debt Consolidation

Many people are attracted to debt consolidation when they feel overwhelmed by their debt, but Ramsey advises against such a service. He explains on his website that "debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. However...we find that the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more, which is why they are in the debt consolidation business."

Instead of staying in debt longer, Ramsey advises people to change their habits regarding personal finance---namely, to get a part time job to pay off debt as quickly as possible, and then live on less than they make and save for big purchases, such as an automobile, over time instead of putting the purchase on a credit card or taking out a loan.