Swimming up a debt waterfall? Try this

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Dear Debt Adviser,
Recently, you ran a column about a woman who had used a debt consolidation service. You said she should lose her debt first and protect her credit later.

I’m in a lot of debt, but I can make all my payments and even pay down a bit more than the minimum. However, it’s too much to really make a dent in my balances. When you’re talking about paying off a few hundred every month out of a $20,000 balance, I might as well be swimming up a waterfall.

What advice can you offer for people who can make their payments and aren’t adding to their debt, but just can’t get out from under their obligations?
— Cameron

Dear Cameron,
Have you ever come to right place — the Debt Adviser has all the answers you will need.

You won’t need to swim up a waterfall. But you may have to paddle upstream in a kayak for a while. I’ll even show you how to increase the size of your paddle, so it won’t take as long to get where you want to go.

Gaining perspective over the situation is where you need to start.

First, you need to find out exactly what you owe and how long it will take to pay off your debt with the monthly payment you are currently making.

As an example, let’s say you are paying $300 per month on balances of $20,000 at an average interest rate of 12 percent. Given that payment amount, it would take you nine years and three months to pay off the debt.

Yes, that may seem like swimming up a waterfall. But once you can see that there is an end to the payments, it may give you the strength to work even harder to get your debt paid off sooner.

Add an extra $100 to the monthly payment and you will decrease your payoff time by three years and five months, meaning you would be debt-free in five years and 10 months. See, we’ve increased the size of your paddle and decreased the strength of the current and you are well on your way.

You may ask, “How am I going to find an extra $100 or $50 or even $200 per month to pay toward my debt?”

Well, being able to stop those payments may be enough of an incentive, but I personally like rewards better. Set a really pleasant goal — perhaps a trip or something similar — and promise yourself that as soon as you pay things off, you’ll redirect the money that’s currently going to the debt service to fund the vacation.

Now you have a motivation to look at your spending and make some cuts. Remember, a $4-a-day latte is $120 a month that you can put toward your debt (and, thereby, your vacation) if you brew your own coffee.

The obvious choices for cost-cutting are items of discretionary spending, such as entertainment, food and clothing. Get creative and keep your goal in mind.

If $100 a month extra is not doable, try to lower your interest rate by consolidating balances onto a lower interest rate card and pay whatever extra you can each month.

As time goes by, you may receive a raise at work, a year-end bonus or a tax refund. Consider putting at least half (or more) of your increased earnings into your debt payments and the time will be that much shorter until you have paid off your debts and can leave for that well-earned holiday.

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or to ask a question of the Debt Adviser go to the “Ask the Experts” page.