Your Financial Snapshot

You'll need to spend less on unnecessary expenses and/or earn more to send bigger payments toward your credit card debt every month.

Negotiate down your APR.

If your bad debt is credit card debt, you need to stop it from increasing. Call each of your credit cards to negotiate down your annual percentage rate (APR), the amount you are charged by your credit card when you don't pay off your balance in full. (APR is calculated as a percentage of that balance.) Inform the credit card company that you plan to pay down your debt and that, unless they lower your APR, you may switch over to another card offering you a better rate (such as 0% interest for the first 12 months). Remind them how long you've been a customer, and say that you'd rather not transfer your balance, but you may if they can't give you a better deal.

Pay off your most expensive card first.

Using the interest rates that you've just secured, rank your cards and any auto loans from the highest rate to the lowest. Beginning this month, pay the minimums on all your bad debt except for that top card/loan. There, send the biggest possible payment you can. Do that every month until you've paid that off and then move the next highest card/loan into the top slot. Keep going until you have paid off all your bad debt.

Consider a balance transfer.

If any of your credit card companies refused to lower your interest rate and an existing or new card is offering you a better rate, then you may want to consider a balance transfer. Many cards offer low APRs (below 10% and even as low as 0% for a limited time) for balance transfers. However, you have to pay a transfer fee up-front (normally 3% of the transfer amount), so only opt for a transfer if:

1. It will reduce your rate by more than 3% and
2. You can pay off that card before the period for the introductory rate is over and the APR jumps up again.

Use cash.

If your bad debt is due to credit cards, the other thing you need to do immediately is stop using your cards. Until you pay off your credit card debt, all your discretionary spending—clothing, dining out and any other expenses that aren't absolutely necessary—should be in cash. (In a few days, you will also learn how to cut your costs.)

For more tips, check out our Get Out Of Debt Bootcamp.

Your priority is to seek counseling.

Unless you can slash your living expenses and significantly boost your income in the near future, you won't be able to pay down your debt while covering your living expenses.

Credit counseling services

A credit counseling company can help you manage and consolidate your debt. Because some predatory companies may try to take advantage of you, make sure to look for a nonprofit organization vetted by the National Foundation for Credit Counseling (NFCC). If you want advice and support from a live person, find a free credit counselor in your area by calling the NFCC at (800) 388-2227 or visiting its website. Counselors will help you figure out a payment plan, provide confidential budget advice, negotiate reduced payments to your lender and, sometimes, prevent your creditor from taking legal action.

When looking for a credit counselor, make sure to find one who makes you feel comfortable and respected. This means you should be able to ask him or her any questions you have, no matter how dumb they may seem A good credit counselor will never bully you into making decisions and will always make sure you are aware of all the consequences of your choices.

Family Loan

If you have family that can help you with your situation, consider approaching them for a loan. To show you plan to make good on your word, write up a contract for both of you to sign that clearly outlines the terms of the agreement. Only go for this option if you know you will honor the loan as you would any other.

Filing for bankruptcy

Depending on your personal situation, your credit counselor may recommend you file for bankruptcy. Oftentimes, someone who absolutely cannot pay basic living expenses while paying down debt finds that filing for bankruptcy is the only way out of an unsustainable situation.

However, it should only be a last resort. Filing for bankruptcy discharges most of your bad debts, including medical bills and rent. However, it does not eliminate all your debts. You will still have to pay student loans, child support, alimony, taxes and any court-ordered damages. Filing for bankruptcy will also drag down your credit score for up to ten years, making it difficult for you to buy a home, get any kind of loan, open a credit card and even buy a computer. It can also affect your career if a prospective employer looks at your credit report.

Then again, if you have this much debt, you may have already damaged your credit and you probably don't have enough savings to buy a house anytime soon anyway. Additionally, if you do have some assets you want to protect, such as your home or retirement savings, then bankruptcy can be a better option than debt consolidation plans that may tempt you to dip into those savings.

There are two ways of filing personal bankruptcy:

Chapter 7, the most common type, allows you to cancel certain debts, including credit card, medical, auto, utilities and rent.

Under a Chapter 13 filing, you and your creditors agree upon a three- to five-year schedule for repaying your debts. Often, those who choose Chapter 13 are people who owe a lot of debt, such as taxes, that can't be discharged under Chapter 7.

If you're still on the fence about what to do, do more research at www.thebankruptcysite.org, www.bankruptcyhome.com or the American Bankruptcy Institute's website, www.abiworld.org.

For more tips, check out our Get Out Of Debt Bootcamp.

Your priority is to pay debts while building savings.

It looks like you're paying off your credit cards every month. If so, keep doing that. If not, then quickly pay off your low balance by cutting spending or increasing your earnings, both of which we will cover in a few days.

Analyze the interest rates on your debts and savings accounts.

People with financial profiles similar to yours often have good debt such as student loans that dwarfs any savings for emergencies or retirement. Depending on your particular circumstances, you could either work on building your savings or paying down your debt. Which one you concentrate on first will depend on the interest rates on your debt, your goals and the timeline for meetings those goals.

If your interest rates are below 6% and you don't have a lot of discretionary income every month...

You should focus on building your emergency and retirement savings before paying down your debt. (If you're a tenured professor, six months' worth of living expenses is probably fine for your emergency fund, but if you're a freelancer, then a year's worth is recommended.) Meanwhile, pay the minimums on your good debt. (A good way to split all the money you are sending toward debt repayment and savings would be 80% toward emergency savings, 10% toward retirement and 10% toward debt payments.)

Once you have a solid emergency fund, pay as much as you can toward the loan with the highest interest rate first, while paying minimums on the others. After you pay off that top loan, pay as much as you can toward the loan with the second-highest rate and continue like this until you've paid off your debt.

If your interest rates are below 6% and you have a lot of discretionary income every month...

You can contribute equally to paying down your debt and saving for emergencies and retirement. (If you're a tenured professor, six months' worth of living expenses is probably fine for your emergency fund, but if you're a freelancer, then a year's worth is recommended.)

Once you have a solid emergency fund, pay as much as you can toward the loan with the highest interest rate first, while paying minimums on the others. After you pay off that top loan, pay as much as you can toward the loan with the second-highest rate and continue like this until you've paid off your debt.

If the interest on your loan is higher than 6%...

You should prioritize paying down your debt over building your assets. Split the money you are sending toward your debt and savings 80/20.

Your priority is to pay off your debt. Though you're in the black, it looks like you have some bad debt – credit cards or car loan – to pay off.

You probably need to budget better in order to be able to afford your lifestyle now while also saving for your future. (We'll cover budgeting in a couple days.) Another option is to earn more in order to send bigger payments toward your credit card debt every month. (We'll talk tomorrow about how to earn more.)

If your debt is significant—say, more than 10% of your annual income—and can't easily be paid off with six months of better budgeting, consider these tips:

If you have credit card debt, negotiate down your APR.

Now that you're serious about eliminating your debt, you need to do everything you can to stop it from increasing. That's why you need to call every single one of your credit cards and negotiate down your annual percentage rate (APR), the amount you are charged by your credit card when you don't pay off your balance in full. (APR is calculated as a percentage of that balance.) Inform the credit card company that you plan to pay down your debt and that, unless they lower your APR, you may switch over to another card offering you a better rate (such as 0% interest for the first 12 months). Remind them how long you've been a customer and say that you'd rather not transfer your balance, but you may if they can't give you a better deal.

Pay off your most expensive debt first.

Using the interest rates that you've just secured, rank your debt from the highest rate to the lowest. Beginning this month, pay the minimums on all your debt except that top card or loan. There, send the biggest possible payment you can. Do that every month until you've paid that off and then move the next highest card or loan into the top slot. Keep going until you have paid off all your debt.

Consider a balance transfer.

If any of your cards refused to lower your interest rate and an existing or new card is offering you a better rate, then you may want to consider a balance transfer. Many cards offer low APRs (below 10% and even as low as 0% for a limited time) for balance transfers. However, you have to pay a transfer fee up-front (normally 3% of the transfer amount), so only opt for a transfer if it will reduce your rate by more than 3% and if you can pay off that card before the period for the introductory rate is over and the APR jumps up again.

If your debt is credit card debt, use cash.

You'll stop accruing more debt if you stop using your cards. Until you pay off your debt, all your discretionary spending—clothing, dining out, and any other expenses that aren't absolutely necessary—should be in cash. (In a few days, you will also learn how to cut your costs.)

For more tips, check out our Get Out Of Debt Bootcamp.

Good work! Your net worth is and it looks like you're paying off your credit cards every month. If so, keep doing that. If not, then quickly pay off your low balance by cutting spending or increasing your earnings, both of which we will cover in a few days. If you have a car loan or good debt such as student loans or a mortgage, pay as much as you can toward the loan with the highest interest rate while paying the minimums on the others. After you pay off that top loan, pay as much as you can toward the second-highest-rate loan and continue until you've paid off your debt.

Now, look at your savings. Do you have six months' to a year's worth of living expenses saved in your emergency savings fund? Are you on track to meet your retirement goals? If you can't answer these questions, or don't know how to get there, don't worry. We'll cover these topics in the next few days.

It looks like you're paying off your credit cards every month. If so, keep doing that. If not, then quickly pay off your low balance by cutting spending or increasing your earnings, both of which we will cover in a few days.

Build an emergency fund

You should be building your emergency savings. In a few days, we will discuss how much you need in your emergency fund, which will protect you from unforeseen financial crises like losing your job, but for now you should aim to save 10% of your paycheck.

Start saving for retirement.

At the same time you start your emergency fund, begin contributing to your retirement account—another 10%. We know it seems a long way off, but by the end of this course, you will see how much more you will have for retirement the earlier you start saving for it.