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Repent, debtors! The 8-step solution is here

The January mail is carrying millions of bombs -- in the form of credit card statements bulging with all your holiday spending. How will you get rid of this debt? Never fear, oh ye of big financial woes, the solution to your unfortunate credit card balance is here. Repent thy overzealous spending ways and follow me!

I'm good enough, I'm smart enough ...
Let's be honest. You're not in debt solely because a big fat man in a red suit pressured you to throw down your credit card at every mall within a 15-mile radius. If you have overwhelming debt, it might have something do to with how you view money.

"We tend to medicate ourselves with money," says Steve Rhode, president and co-founder of the financial management organization Myvesta. "You have a bad day, so you go out with your friends to cheer yourself up. You have a good day, you go out with your friends to celebrate. People spend money in an attempt to reduce stress, increase their self-esteem or impress others.

"Around the holidays people spend more because of guilt. They try to compensate for time they are spending away from their families."

But as you have probably found out, debt neither reduces stress nor increases self-esteem. Few people are impressed when the Repo man comes calling and even the most expensive gift will never make up for lost time. But because of the ease of borrowing on plastic, credit card debt in the United States continues to grow.

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How bad is the situation? According to the Federal Reserve, outstanding consumer credit rose more than 4 percent since last year, up to a whopping collective debt of almost $724 billion.

"We anticipate over 25,000 people will contact us in January to discuss their financial situation," says Kelly Rote, public relations coordinator for the financial guidance organization Money Management International.

Are you in serious debt?
If you have to ask, the answer is "yes." To find out how dangerous your debt level is, take a spin on the Bankrate debt-o-meter.

Now that that's settled, what can you do about it? Check out this eight-step plan to rein in your debt.

1. Examine and understand your spending
"Consumers should treat this year's holiday charges as a learning experience and resolve to do better next year," says Rote. "The goal is to rid themselves of this year's holiday debt before next year rolls around."

So, like your relationship with Norbert Nerthwacker, your eighth grade Dungeons and Dragons-playing boyfriend, you can learn from this mistake and move on. But first you have to figure out the cause and size of the problem.

"Take a look at the overall situation," says Rhode. "Before you do anything, you have to look at where the money is going. People tend to spend more because they don't have a plan."

Rhodes recommends tracking all expenses including cell phones, food, utilities and car payments to start with. By reading your statements and bills, you may find you are paying for unnecessary services such as credit card theft protection or a home alarm system you haven't turned on.

You can probably get a lower credit card rate or a less expensive cell phone or long distance plan just by shopping around. The money you've been wasting could mean the difference of several hundred dollars. If you haven't refinanced your car or house, see if doing so now will save you money.

At this point, you must face reality.

"There are only two legal ways out of debt," says Rote. "Cutting expenses or increasing your income. Decide which works for you and get to it."

2. Put away your credit cards
Put them in the freezer or lock them in a box if you have to, but the spending spree is over.

"It's like a sinking boat," says Rhodes. "Plug the hole, then we'll deal with getting the water out."

Credit cards put away? Good. The hole is officially plugged. You now pay cash for all your purchases.

3. Cut unnecessary expenses
An often-debated strategy among financial planners is whether to write out a budget or not. "The worst thing to do is make a budget," says Rhode. "At the end of the month you'll look at it and say, 'See, I knew this would fail.' "

While they look good on paper, the problem with budgets is that they can be unrealistic and hard to follow.

"Going on a crash financial diet, just as a food diet, can result in extreme fluctuations of unrealistic goals and extra spending," says Rote.

If you attempt to become financially anorexic, you're eventually bound to find yourself in a metaphorical Krispy Kreme, gorging on expensive pick-me-up presents.

4. Stop impulse spending
"Watch where your money goes and make educated decisions," says Rhode. You shouldn't knock deodorant and toothpaste off the grocery list in an attempt to save, but do curb all impulse buying. No more little presents to friends and no more shopping for fun. It's not that you can't spend -- it's just that you're going to have to be more responsible about it.

If you see something you feel you absolutely must have, walk away. Force yourself to think about the purchase at least overnight and weigh the pros of having it, with the cons of spending the money.

5. Seek out extra income
A raise would be great, no doubt about it. So if it is feasible, ask for a raise or take on a second job to help you pay your debt. But assuming you get one, your long-term problem will not be solved. Because your problem, my friend, is not your income, it's how you spend your money.

"We have a number of clients who make more than $1 million a year and are in debt trouble," says Rhodes.

So obviously, while it would be great to get a raise, money alone doesn't solve spending problems. You need to change your spending attitude.

6. Pay as much as you can
If you pay only the minimum on your credit card, you could be in debt for the rest of your life, or at least a very long time. Use this calculator to see just how long.

Make an effort to pay more than the minimum. Pay as much as possible every month. Attack the card with the highest interest rate first while paying the minimum on the others. Once the first card is paid off, move on to the next one.

At the same time, you need to start a savings account, no matter how small. You don't want to be forced to use your credit cards again if disaster occurs-- like a broken car or a broken arm.

7. Still sinking? Get help if you need it
"If you can't make a dent in your post-holiday debt, consider credit counseling from a credible source," says Rote.

"Credit counseling is good if you can afford the fees, but they don't solve the problem," says Rhode. "They just get the payments under control."

So if you don't plan on changing your spending habits, don't expect to get out of debt. "Think long-term," says Rote. "Let your financial health become your lifestyle."

If you decide to use a credit counseling service, carefully research the agency before signing any documents. Just because an agency claims to be nonprofit doesn't mean they have your best interest at heart. Here's how to find a counseling service that fits your needs.

"People want a free solution to their money problems, but you get what you pay for," cautions Rhode.

8. Plan ahead for next year
The holidays will roll around again. It would be horribly ironic to dig yourself out of debt only to plunge face first in it again next year. Resolve to be prepared.

"Figure out how much you really want to spend next year and divide that by 12," suggests Rhode. "Put that much aside every month. Next year you'll have a stress-free holiday. Like we say here (at Myvesta), 'You can't change the past but you can change the future.'"

-- Updated: Dec. 19, 2003

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