Life Lessons 101

How to Tell if It's Good Debt or Bad

07/25/08 - 08:59 AM EDT

Peter McDougall

The economy is struggling, and consumer debt is at an all-time high. Total consumer credit reached nearly $2.6 trillion in May, according to preliminary numbers released earlier this month by the Federal Reserve Board --and that sum excludes loans secured by real estate (e.g. mortgages and home equity loans).

In some cases, consumers are carrying so much debt that they can barely cover their interest charges, much less pay off their balances. This is especially true of credit card debt, where some interest rates are over 20%.

If you have more debt than you can handle -- and potentially skyrocketing rates on your adjustable rate mortgage or credit cards -- you need a plan. That means figuring out exactly how much you owe, and how best to pay off your bills.

Organizations such as the Consumer Credit Counseling Service of Greater Atlanta (CCCS) can help you set priorities for your debts. And your first priority should be to protect the basics: your sources of shelter and income.

BankingMyWay

"We encourage consumers to see that their first priority is their mortgage payment or rent," says Dick Reed, regional counseling manager at CCCS of Greater Atlanta. "Do they need their car to get to work? Then another priority is to protect your car, or your access to whatever transportation you need, to get to work." After all, if you can't work, paying down your debt gets a lot harder.

You should also be smart about how you pay down your debt, especially in the case of credit card balances. Reed explains that many consumers take a shotgun approach to credit card debt, where they spread their payments too thin across their various balances. Instead, he recommends paying off the debt with the smallest balance first, while making minimum payments on everything else. Once you've paid off one bill, then put that payment toward the bill with the next smallest balance, and so on.

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Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.

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