No. 4: Keep debt where it is. Ramsey warns that moving debt around is only putting a temporary patch on your financial wounds. "The danger of moving credit card balances is that it's easy to start thinking you've actually done something to address the problem," he says. After all, you still have all that debt to pay off.
According to Riley, it's also important to keep in mind, especially if you plan to apply for any type of loan in the near future, that opening a new credit account will negatively affect your credit score for the short term.
No. 5: Grow your emergency fund. In its 2011 Consumer Financial Literacy Survey, the NFCC discovered that 33 percent of Americans have zero dollars in nonretirement savings. "They are one flat tire away from financial distress," says Cunningham.
When an emergency does happen, the cost may mean adding to the current debt load, borrowing from friends and family or forgoing other expenses.
Cunningham advises against wiping out savings to pay down debt, especially if you're not confident about the security of your job. Instead, she suggests keeping a "rainy-day cushion of at least one month's income" in an emergency fund.
No. 6: Use some savings for debt reduction. If your debt is overwhelming, you might decide to dip into your savings. Just don't bleed it completely dry, says Ramsey. "I always recommend having a $1,000 emergency fund while you get out of debt. Emergencies will happen." You don't want to put yourself in a position where you have to borrow money for the unexpected, he says.
Once you are debt-free, says Ramsey, then you can shift your focus onto building an emergency fund that will cover three to six months' worth of expenses.
A debt reduction breakdown
|Technique||Pros||Cons||Who it's good for|
|Debt snowball method||Get motivated every time an account balance reaches zero.||On paper, it's not the most financially sensible.||Those motivated by small successes.|
|Balance with highest rate paid first||You'll save more over time.||Must be very focused, and stick to a rigid payment plan.||Those motivated by interest savings.|
|Balance transfers||Will allow you to save on interest, so you can pay off the principal faster.||Opening a new account can hurt your credit score in the short term.||Determined risk-takers.|
|Savings-focused||"Rainy day" money means you'll be prepared when emergencies arise.||Savings account interest is less than the interest on your debts.||Potential layoff victims.|
|Debt payoff-focused||The feeling of relief that comes with a clean slate, and an improved credit score.||If an emergency occurs and savings cannot cover it, you may be forced to borrow.||Anyone who's consumed by their debt.|