Don't Let Debt Get You Down

Credit-card debt isn't all bad. A little can get you out of a tight financial jam -- but a lot can lead to its own money emergency.

How can you tell if your debt load is nearing a critical level? Look for these symptoms:

1. You're unable to make the minimum payments on your credit cards

2. You borrow from one card to pay another

3. You're frequently charged fees for late payments or going over your credit limit

4. You use plastic out of necessity rather than convenience

5. You forgo contributions to savings and retirement plans because of your debt

6. You devote more than 20% of your take-home pay to making payments on credit cards and loans other than your mortgage.

If you find yourself in any of those situations, don't panic. Finding a cure may be as simple as working out better terms with your creditors, consolidating your debt on a credit card that carries a low interest rate or, if necessary, taking out a home-equity loan.

Need outside guidance? A reputable credit counselor can help you craft a debt-management plan that works for you. And if all else fails, you can declare bankruptcy.

For Juan Salazar, the remedy was credit counseling. Salazar, 33, owns First Choice Paint & Body Shop, in Terrell, Tex. When he and his wife, Elizabeth, had their second child in 2004, they had no health insurance and paid most of their medical bills with credit cards. Once their debt totaled $25,000, it became too much for them to handle alone.

In 2005 the Salazars enlisted the help of the Consumer Credit Counseling Service of Greater Dallas, which consolidated their debt and lowered their interest rate. The agency also helped the Salazars cut back on their expenses and stick to a budget. "We wanted to try credit counseling before taking an extreme measure like filing for bankruptcy," says Juan. Now he and Elizabeth plan to be debt-free by 2009.

Grab a 0% offer

You can give yourself a respite by moving your balances to a card that charges 0% or another low introductory rate on balance transfers. To play this game, however, you have to keep tabs on the interest rate, your balance and the calendar. If the account isn't paid in full by the end of the introductory period, you may have to transfer your balance again to dodge an interest-rate spike.

You may also be able to take advantage of an offer that gives you a low fixed rate for the life of the debt. You'll have to compare that choice with the possibility that you might receive a better deal in the future. But it's often best to go with the certainty of a fixed rate rather than waiting for an offer that may never come.

One caveat to switching your balance: Juggling various credit offers can cause your credit score to drop because lenders take note when you apply for or open a number of accounts within a short period of time. To limit the damage to your credit score, keep existing accounts open when you move a balance to a card that offers a better deal. Closing an account reduces the average age of your accounts and increases the ratio of your outstanding debt to your available credit. Both of those factors will have a negative impact on your score.

Even as the air wheezes out of the housing bubble, consolidating your debts with a home-equity loan will get you an attractive fixed rate. Recently, rates have averaged about 8% for a home-equity loan and 9% for a variable-rate home-equity line of credit. And borrowing against your house comes with a bonus: Interest on up to $100,000 in home-equity debt is tax-deductible.

The downside, of course, is that your house is on the line. To keep your roof over your head, it behooves you to pay off your outstanding debt and stop the flow of red ink.

Find a pro

When the Salazars knew their debt was out of control, they sought help from a credit-counseling agency. But finding a trustworthy agency and avoiding the industry's sharks can be treacherous.

A good credit counselor should give you advice on how to rein in your spending, as well as being able to craft a debt-management plan for paying off your creditors. Under such a plan, the counselor works with creditors to lower your interest rates or work out better repayment terms. You make a single monthly payment to the agency, which then pays your creditors. A counselor's services should be free or cost no more than a nominal fee.

Credit counselors often face a conflict of interest because much of their income comes from the payments they collect on behalf of creditors. In many cases, unscrupulous agencies ignore the advice aspect of their business and push clients into debt-management plans they can't afford, which eventually leads to bankruptcy. In other cases, credit counselors advise clients to delay bankruptcy -- which might be in a client's best interest—so agencies can continue to collect fees.

The Salazars chose the Consumer Credit Counseling Service of Greater Dallas because the agency had successfully assisted some of their friends. "We make monthly payments to the agency, and it disburses the money to our creditors in a way that pays down our debt the fastest," says Juan.

To vet counseling agencies in your area, contact the National Foundation for Credit Counseling (www.nfcc.org) -- of which the Consumer Credit Counseling Service, which has offices nationwide, is a member -- or the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org). Interview a few agencies, ask for references, and screen your picks with the Better Business Bureau.

Ask creditors for a break

Before you look for a credit counselor, try the do-it-yourself approach. You might be able to get immediate relief simply by haggling over fees and interest rates with your creditors.

Scott Bilker, founder of DebtSmart.com, isn't shy about trying to cut deals with his lenders. He often calls credit-card issuers to ask them to reduce fees, lower interest rates or increase rewards, and he estimates that his efforts have saved him tens of thousands of dollars. "Your best deals will come from the cards you already have," Bilker says.

Bargaining requires preparation and persistence. Know how much you spend with a particular card issuer and what terms you'd like to propose before you make the call, then be ready to act on any offer made over the phone. That gives you leverage when you negotiate, Bilker says. Use low-interest-rate offers you've received in the mail as an incentive for card issuers to adjust your rate and keep you as a customer.

If the first person you talk to says no, ask to speak to a supervisor and stay on the line. "People give up too easily," Bilker says.

Bankruptcy: A last resort

When all else fails, declaring bankruptcy may be an option. But the bankruptcy law, which was revised in 2005, makes it tougher for individuals to travel this route without a lawyer. An initial consultation should be free. You'll need to bring information about your expenses and sources of income, including pay stubs, tax returns, mortgage papers and documents that detail any unusual health-care or business expenses.

Filing for bankruptcy should be a last resort. Most negative information on your credit report expires after seven years, but a bankruptcy filing stays on your record for a decade. That financial black mark can make it difficult to get credit at a reasonable rate, buy a home, purchase life insurance and sometimes even get a job.