Kiplinger: Climb out of debt faster

Too many twentysomethings are letting debt drag them down. People aged 22 to 29 who carry debt owe an average of $16,120, according to a recent study by USA Today and the National Endowment for Financial Education. That’s 10% more than just five years ago. The debt load is high, no doubt — but not insurmountable.

If the thought of paying off student loans and credit card debt makes you want to turn tail and run, it pays to stay the course. After all, if you devise a plan to handle your debt now, you’ll be less likely to let it get out of hand later. And the sooner you get it under control, the sooner you can free up cash to save for your future. The USA Today/NEFE study found that more than half of twentysomethings aren’t saving in an IRA or 401(k), and 40% don’t have a savings account they contribute to regularly. If you can climb out of debt now, you can get a jump on saving for a home or something else you really want.

Here are five steps to get your debt under control, no matter how insurmountable it may seem:

1. Take stock. The first step in wiping out debt is to figure out how much you owe and how much it’s costing you. Write down your outstanding balance and the interest rate of every credit card and loan. This might not make you feel better — in fact, you’ll probably feel worse — but it’s necessary. “You can’t control what you can’t count,” says Bob Schumann, a financial planner in Gahanna, Ohio. Use our tool to find out what it will take to pay off your balance.

2. Identify good debt and bad debt. Student loans, for example, are good debt because you borrowed to help build future wealth, and the asset you bought will long outlast the debt. “Your college education paves the way for you to make more money throughout your lifetime,” says Schumann. Besides that, student loans — though no longer at rock bottom rates — come cheap, you can take years to pay them off and can deduct the interest you pay on them on your federal tax return (if your income doesn’t exceed certain levels).

Bad debt, on the other hand, charges a hefty premium in borrowing rates and can only lose value over time. Credit card debt is at the top of the “bad” debt list. Second in line: auto loans. In both cases, young people don’t often qualify for the best rates. An auto loan will run 7% to 8% depending on the term and whether you buy used or new, and the average rate on standard credit cards is 15%.

3. Stick it to your lenders. First things first: Stop using your credit cards. You can’t chip away at your debt effectively until you stop adding to it. Take the cards out of your wallet so you won’t be tempted, or just keep one for emergencies — beer doesn’t count.

Next, call your creditors and ask for a lower rate. Often they’ll say yes, especially if you’ve had a good credit history. If that doesn’t work, try transferring the balance to a lower rate card or taking advantage of an introductory offer that will give you a break on the rate or even 0% interest on balance transfers. (Shop for the best credit card deal.)

Beware of two potential pitfalls, though: A balance transfer fee will usually apply (perhaps 3% of the balance), and the introductory rate has strict limitations. Know when the teaser rate expires, what the new rate will be and what situations, such as late payments, will result in a loss of the teaser rate. Don’t close your account with your old company after you transfer a balance — the unused credit can actually raise your credit score.

4. Curtail costs on student loans. Even good debt can cost more than it should. The interest rate on outstanding student loans is 6.54% if you’re in school, or 7.14% if you’ve already started repaying. If you have multiple loans, consolidate them to lower your monthly payments.

You can now shop around for the best terms, thanks to recent legislation. In years past you had to consolidate with the lender that held your loans. Many lenders offer rate reductions for 24 or 36 consecutive on-time payments, or for having your payments automatically debited from your checking or savings account. Compare deals at ConsolidationComparison.com.

5. Spend smarter. Use our budget worksheet to see how much you are spending and how much you’ll have left over at the end of each month to use toward paying down debt.

Cut down on unnecessary spending to free up your cash flow. For example, forgoing a $20 happy hour after work once a week would save you $80 a month. On a $1,500 credit-card balance at 15%, adding that $80 to a regular $60 payment would save $189 in interest — and you’d completely pay off your debt in one year instead of almost three. Use our calculator to see how much extra payments can save you in time and money. And see Stop Living Paycheck to Paycheck for more strategies to control your spending.