Trimming Your Debt

By Jean Chatzky

If you were a little, say, heavy-handed with the plastic this holiday season, you may find yourself regretting that behavior when the bills roll in. Why? Banks and credit-card companies must follow new federal guidelines from the Office of the Comptroller of the Currency that require minimum payments to cover interest and fees plus at least 1% of the principal. For the 7% of consumers who pay only the minimum, that will mean writing fatter checks. But what if you're sick of the whole plastic ride and really want to put a serious dent in your debt? Here's how to get started.

LIVE JUST A LITTLE LESS LARGE

When you think about how you got into this mess, chances are it's a result of spending a little too much for a little too long. My book Pay It Down, now out in paperback, contains a step-by-step plan based on the idea that digging out of debt means reversing the process. So think about expenditures that you can trim. The faster you want it to happen, the bigger the cuts you have to make. While eliminating a daily latte will do a bit of good, you'll do better to focus on the dramatic. Do you really need that third car, for example? What if you cut back to basic cable or a bare-bones cell-phone plan, or (if you can't do that) got rid of your landline entirely? Perhaps this summer you could vacation at home instead of spending $2,000 for a week at the beach, or trade two weeks for a seven-day getaway.

REFINANCE YOUR MORTGAGE

In recent years about a third of all mortgages issued have been adjustable. That's the highest percentage since 1990, when the Mortgage Bankers Association began tracking such numbers. When rates adjust, says Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage-rate information, you could find yourself looking at an interest rate of 7%. Bring down the rate by locking into a 30-year fixed-rate mortgage at today's 6.3%. On a $275,000 mortgage, you'll save $128 a month, or $1,526 a year.

GET TECHNICAL WITH THE IRS

More than two-thirds of Americans received a tax refund last year, and that return averaged $2,200. To get your refund back as quickly as possible, consider filing your taxes electronically, and then elect to have the refund deposited directly into your account. You'll have your money in 10 days to two weeks rather than six to eight weeks if you file by snail mail.

CREATE NEW FINANCIAL HABITS

Once you've made those sacrifices, be sure to make them stick. How? Use a debit card rather than a credit card, so that you're spending money you have, not money you don't. And start keeping track of where your money is going so that you can stop yourself from overspending in 2006.

12 to 13 THE NUMBER OF CREDIT CARDS PER U.S. HOUSEHOLD

$7,200 THE OUTSTANDING BALANCE HELD ON THOSE CARDS

18% AVERAGE INTEREST RATE CHARGED BY CARD ISSUERS

With reporting by With Reporting By Amanda Gengler