Even if you have a good credit record, this four-letter word will drag down your credit score, driving up your rates and costing you both money and opportunity. The diminutive word “debt” strikes big fear into the hearts of an increasing number of Americans, but facing debt doesn’t have to be so scary.

Here are four steps that certified credit counselor Bruce McClary uses to defang debt problems for his clients at Clearpoint Financial Solutions in Richmond, Va. 1. Get debt at the lowest rates

Getting debt at the best possible interest rates can be a surprisingly short process. To get lower rates, first familiarize yourself with the rate you are currently paying and then negotiate with your card company for a better deal. If that doesn’t work then shop and transfer to lower rates, and finally, eliminate highest rate debt first.

Decrease or desist. Negotiating for a lower rate or giving a high-interest card its walking papers is the highest impact move people with decent credit can do. The key is to look at interest rates and see what the creditors are charging. “If rates are in the double digits (13 percent or 14 percent) take steps to look for a lower rate,” McClary says. If you can’t negotiate for a better rate, shop for a better rate. “Companies like loyal customers, but what do you as a customer get from that loyalty?” he asks.

“Negotiating a better interest rate is easier if you are a loyal customer, carry a balance and have good credit.”

If you’ve been a good customer for a number of years, you’re in a better position. Remind them of this, cautioning that you will look for a better option if not satisfied. “This can produce good results if you have decent credit,” he says. It works even better if you are carrying a balance.

Go shopping. It’s perfectly OK to transfer a balance to a card with a lower rate, but make sure to read the offer carefully. Is this an introductory rate? What happens when the introductory period is over? If you’re enticed by low-cost balance transfers, check for transfer fees or other charges. Creditors may waive transfer fees voluntarily, so ask. And remember, no fees are written in stone, not even annual fees. Shop for the best deal on a balance transfer.

Before signing for a new card
  • Understand that missing a payment with one creditor can affect the rates you are paying on other cards. Notice of this preemptive strike is buried in the fine print of the credit card agreement.
  • Look for finance charges and terms, and understand when they can change.
  • Understand all the rate terms.
  • Figure out the penalty rates and when they can kick in. There are differences between creditors and when they will push the button on a penalty rate and how high rates can go.
  • Get a handle on how the minimum monthly payment is calculated, even though you’ll conscientiously want to pay more than the minimum each month.
  • Know what the grace period is (if any) before interest charges set in.

Opening new cards and closing old accounts both negatively impact your credit score in the short run, so avoid using these steps shortly before making a large purchase. Bankrate’s interview with FICO spokesman Craig Watts covers the topic in detail.

It may sound like a lot, but read every word of the customer agreement before signing for a new card. If you don’t understand something, turn to the credit card company and ask them to talk you through it. Remember the best advocates are usually impartial, so go to a credit counselor for a free counseling session to get it explained in clear terms. If you qualify for legal aid, take the agreement to a free legal clinic.

The final tip to getting debt at the right price is to pay off your highest interest balances first. While you may see quick results by paying off lower balances, you’re not looking at where interest rates are doing the most damage. Use our debt paydown calculator to come up with a very precise plan of attack.

2. Plug the leak

If you’re in debt, you’ve got to stop digging in order to get out. Stop charging, live within your means and change destructive behavioral patterns. “Don’t use your credit card like an ATM for cash advances or to buy a hot dog and soda,” says McClary. This drives up your outstanding debt ratio very quickly.

Increasingly creditors are discontinuing the monthly grace period, meaning interest starts to accrue at time of purchase. Build a savings cushion so you’ll have somewhere to turn instead of the credit card when an unexpected expense pops up.

3. Ignore minimum payments

Don’t use the minimum payment as a guideline for what to pay your creditors each month. Those are set up to string out payments (and interest charges) for as long as possible. “Even paying an extra $10 or $20 per month could save you thousands on interest over the course of time, depending on how much you owe,” says McClary.  Check out what extra payments can do to speed up your payoff.

The minimum payment covers interest and a tiny portion of the balance. Every time you make a payment, try to pay off the purchases you made during the billing cycle, plus interest and a portion of the balance. This will help to chip away at your balance a lot faster.

Set up a payment timetable by using our debt paydown calculator. Know that you can always fall back on minimum payment if times get tough, but strive for more.

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4. Have a budget

Create a budget; include your financial goals, their time frames (short, medium, long), and a step-by-step plan to achieve those goals — your payment schedule will help get you there.

It might sound a little backward, but to make your debt-free plan work, you need to address the basics. That includes paying yourself first: put money into savings. Even if you’re over your head in debt, you still need to save, just scale it back to a minimum of 5 percent of take-home pay while you focus on paying creditors. This is part of what’s going to get you out of that debt spiral. You can segment that money as set aside for a future goal or emergencies. Then go into your budget and fine tune. Cut out excessive or unmonitored spending. Write down everything spend for a month or two to see where your money is going. After tracking, you’ll start to see where things need to be reeled in and where you can shift funds.

“This is not a fun process,” McClary says. “It’s like flossing: Getting into and staying in the habit is the most important thing.” Recording expenses as they occur is easiest. “Carry a small notepad and jot down quickly. Do it right away,” he says. If you save receipts and compile them later it becomes a monster task and people give up.

Save receipts for all noncash purchases and use them to cross check your statements. “Don’t go by what bank says,” McClary says. “Cross-check their records.”

This strategy isn’t a debt diet, it’s a healthy financial living routine. Even after you’ve erased or gotten debt to your optimum level, keep following these steps to stay out of trouble. Use this work sheet to set up your budget.

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