If you're up to your earlobes in debt or have black marks on your credit report, two things need to change, says financial planner Eileen Sharkey.
One is to pay off the debt. The harder part is to change the underlying spending patterns that racked up the debt in the first place.
"It's very difficult to change spending habits overnight," says Ms. Sharkey, a principal at Sharkey, Howes, Wagner & Javer in Denver.
You need to set a realistic budget and learn to stick to it. And learn to make purchases only with available cash, not with credit.
That's what Robert learned five years ago when he entered Debtors Anonymous. Between 1983 and 1991 he ran up $62,000 in debt to credit cards, family, friends, and others.
"I used to be afraid to open envelopes, because I was afraid they would be bills," he says. "I didn't want to know how much trouble I was in."
After five years, David has whittled the red ink down to $2,000.
But it hasn't been easy.
"Going on a budget can't be like going on a diet," Sharkey says. "Eventually you binge."
That's why debt counselors recommend budgeting a small amount, say 2 percent of your income, as "mad money," cash for small things that won't break the budget.
Sharkey takes this concept a step further. She tells clients to set up a separate bank account for "whatever." People budget pretty well for monthly expenses, she says. But often they don't anticipate occasional bills such as home repairs or even property taxes.
So track your spending for six months, she suggests. Then create a "whatever" account. How much goes in it? The difference between your income and the amount you can account for spending.
If, for example, you earn $25,000 after taxes and load $3,000 a year onto credit cards but can only account for spending $20,000, you would put $8,000 a year in the "whatever" fund.
"If you make people put it away, they very quickly discover what they were spending it on," she says.
Paying it down
To get credit cards paid down, personal finance author Ric Edelman recommends listing all of your creditors, their addresses, the amount you owe them, and the interest rate they charge you.
Then arrange them in the order of how much interest they charge. Pay as much as you can every month to the card with the highest interest until it's paid off. Then move on to the next one.
Many experts suggest using any savings you have to pay off debt, because creditors charge you more interest than you can earn on savings.
Sharkey, a nationally recognized expert, disputes this approach: "You have to build up savings at the same time," she says. "Otherwise, the first time the car breaks down, you go back on credit."
Running up new bills while you're trying to pay off old ones is a common trap, says Steve Rhode, president of Debt Counselors of America in Rockville, Md.
For example, 80 percent of people who take out debt-consolidation loans go on to charge up new bills on their old credit cards, Mr. Rhode says. Then they have payments on the consolidation loan in addition to the credit cards.
"You cannot borrow your way out of debt," he says. "We receive e-mails and calls from people every day telling us that getting the debt consolidation loan was the final nail in their financial coffin."
Consolidation loans can make sense by lowering the interest rate on the debt, he explains, but you must hold the line on new debt.
One approach is to cut up your plastic. Some people take their credit cards and put them in the freezer: Out of sight, out of mind.
A less dramatic, Sharkey says, is to record every credit card expense promptly as a debit in your checkbook register. Subtract the amount from your checking account balance, and the money will be available at the end of the month to pay the bill.
Be persistent, experts say: While progress is sometimes quick, it often takes as long to get out of debt as it did to get in.
A number of nonprofit groups offer to consolidate debtors' bills: You pay them and they work with creditors to arrange a repayment schedule.
Two of the best known are Debt Counselors of America (800-680-3328) and the Consumer Credit Counseling Service (800-338-2227).
To look at your credit report, call the three largest credit reporting agencies:
* Experian (800-682-7654) offers one free copy a year.
* Equifax (800-685-1111) charges $8 except in states that forbid charging.
* Trans Union (800-888-4213) also charges $8 except in those states.