Debt isn’t something that has a single cause. Normally, it’s the accumulation of a whole bunch of tiny habits of spending together with the lack of attention to paying. Credit cards are seductive that way. If you’re paying cash, you immediately feel the pinch, because your wallet looks emptier. With a card, you don’t feel the pain, because it’s boring to keep track - and a large credit limit means that you don’t get that “empty pocket” feeling that restrains spending. So if you couple that with a minimum payment rather than the total payment each statement, it adds up.

So how do you break out of this? Here’s an eight step approach. (And I couldn’t resist the wordplay, because all the words describing the steps end with -ate).

Calculate.

Get out all your statements - credit cards, loans or other debt. Add all the outstanding totals. Chances are, the total will be higher than what you think it is; most of us tend to underestimate what we owe, and overestimate what we have.

Now, start adding up all the amounts that represent fees, interest charges, penalties and the like. Be prepared for another shock - typically, if the debt has been hanging over for a year or more, these could be anywhere from a quarter to a half of the total dues.

Third, add up all the spending on the card that doesn’t stay with you. Or you don’t remember having spent on. Things like eating out every day, impulse purchases, things you could have done without - and things which you regret having bought now, because it hasn’t been as good as you thought it would.

You’ll find that these would cover a sizeable chunk of what’s due. Together, fees and frivolous spends are likely to be anywhere from three quarters of the total to all of it.

Now, calculate what are the charges you’ll incur in future (interest, fees) because you can’t pay it off overnight.

Once you’ve done this, write out a small card for your self. Just 4 lines, which you keep handy in your wallet. Here’s a made-up sample.

I owe $19,000.
$9,000 is interest and fees, because I couldn’t afford to pay.
And $7,000 was things which I didn’t need.
And it costs me $150 a month extra as long as I can’t pay it off.

Use this to make yourself pause and think, before you give out your credit card for any purchase. The purpose is not to totally stop any purchases; some could be essential. But be sure that you really do need to buy this, before you buy any more.

Estimate.

Now that you have the totals in front of you, work out how much you can devote to paying off the debt, each month. And how long it would take, to pay it off at that rate. At this point, all you’re doing is working out your comfort level in paying off - you haven’t yet looked at other measures to economise or speed up the payoff. A useful thumbrule is to consider 10% of your take home pay as being what you can comfortably apply to debt reduction; but situations vary, so figure out what you are comfortable with per month. Use this to estimate your time to closure, and whether you’re comfortable with that period.

So far, you haven’t done anything about reducing the debt - all you’ve done is psyching yourself up for the process.

Mitigate.

There are several options available to bring down the debt or the rate charged.

For starters, check out whether you can bring down the rate through a balance transfer or a debt consolidation. It doesn’t pay off the debt - just makes it a teeny bit easier to cope with. You might be able to bring down the rate by about 4 - 5 percentage points, if this works out.

Talk to each of the card / debt providers. Check if any of the charges (late payments, fees) can be waived off. Don’t be afraid to ask - most of them will waive off recent charges, if you approach them politely. Customer service policies typically give the front line person authority to waive recent charges upon request. Older charges may take some additional effort and time. This could knock off upto 5 - 10% of the total dues.

Can you switch to an unsecured line of credit / overdraft type account? This is NOT your home equity line of credit (HELOC) or other secured overdraft. The bank where you deposit your paycheque, is a good place to start. Another could be the bank that’s given you a low rate card. Talk to them about the purpose - to consolidate debt and pay it off.

Allocate. And Automate.

When you have the final picture about what you owe and to whom, that’s where you start deciding how to pay it off. Generally, the plan is to make minimum payments on all but one, and choose one to have it paid off fastest. Then you take the next, and so on.

There are different views about how to choose the first to be paid off; some people suggest that you start with the smallest, others with the largest. Yet others with the one that carries the highest interest. All of these have merit; choosing the smallest means that you’ll see progress fastest, the one with the highest interest means you’ll effectively be lowering your interest rate faster - but the differentials are so small that you can choose any one of these.

The important thing is to decide on your allocation of payments, and then making it foolproof. If the debts are the last thing you pay, it never gets paid off. My recommendation would be to make these automatic; most banks support automatic payments, and if you’re doing it online it’s definitely easier. Set these up so that the minumum payments on all cards and the defined payment on the one you’re paying off get automatically remitted - that way, you won’t have additional “late fee” payments adding to your burden, or finding that you haven’t enough money in your account at the end of the month.

Regulate. And Alternate.

It’s no point trying to cut down debt on one side if you’re going to add spending on your card the other. You need to regulate your card use. And to find alternate ways of spending time that don’t have you spending money.

1) If you can, switch to a debit card. That way, no additional credit charges get added up - it directly goes from your bank account. But make sure you aren’t going to incur additional costs just to get a debit card or to use it.
2) Another option is to keep all your cards at home or somewhere inaccessible so that you don’t have it in hand when you go shopping. If you do need to use a card, choose only one, preferably the one which has the lowest remaining limit. Change around where you keep it - if it’s habitually in your wallet, leave it in your car or in your bag; the idea is that the extra time required to get it gives you the time to rethink your impulse to buy.
3) When you do have to go shopping, prepare for it in advance - make a list, and stick to it. No additions.
4) If you’re one of the impulsive window shopper types, just don’t go. Or leave all cards at home if you must go.
5) List out all the regular activities you indulge in, which add up to a huge outgo. Buying a sandwich? Brown bag it instead. Eat out regularly ? Reduce the frequency - and can you find other places that are easier on the wallet? If Friday evening binges are an issue, find different activities to replace those. Go bicycling instead of golf or tennis. Every little bit helps.

The worst thing you can do is sit idle by cutting out any activity - boredom will drive you out, and you’ll end up on some or the other binge which you’ll regret. Find alternative ways to occupy your time.

Escalate.

So far, you’ve not pushed the level - you’re doing all of this at a pace you’re comfortable with. Once you’ve got it going, reset the bar. If you had 10% of your income as the repayment, push it up - to 12%, or 15%. Or more.

This is going to call for extra effort. And creativity. Think of ways you could increase your take home - even if it’s by a few dollars. Are you using all the benefits that you could get from work? Or the incentives? Or is there some kind of part time activity that you could take up, to earn a little more?

On the spending side - what more can you do to spend less? Get creative here. Most people stop with regulating the discretionary spending. But that’s the least of it.

A quick example here. A few years ago, we went through a bad patch - September 11th hit my startup business. Pretty soon, it was clear that we needed to drastically reduce home spending to keep afloat till things improved. Top of the list was the rental. We were paying $1400 a month at that time. The owner was out of town, and we had a good relationship - so I emailed him to let him know that when the lease expired (three months away) I wouldn’t be renewing. He called back, to find out why; so I explained that the business had been hit, income was way down - and I needed to reduce expenses, so was planning to shift to a smaller home at a much lower rental. I didn’t think too much about it when he asked what kind of home I was planning to rent; rentals here are pretty predictable by size and location, so told him I was shifting to a smaller home that would be about $1000 per month.

Two days later, I got back another call from him. He’d thought it over, and had a proposition. If I moved, he’d have a vacancy and need time to find a replacement; plus with the WTC impact all around, it might take him a lot more time. Plus, being out of town (quite far away) he’d spend a lot more just trying to get it rented out. Net effect - if I was willing to consider $1100 (that covered his instalment payment), he’d start at that rate immediately for a 1 year renewal. That’s $300 down - and for us, the relief at not having to move and re-settle plus the savings on moving expenses and effort (packing, unpacking) made it a no-brainer.

Vacations became camping trips in the neighboring woods instead of flights to the beach side for a week’s stay. Eating out changed to alfresco packed lunches or dinners. You get the idea here. Any expense can be modified, if there’s adequate time ahead. You just need to want to.

Associate.

Being in debt is painful. And when you’re trying to get out of it, demoralising. It kind of gets you down, all the time. And some way along, you don’t feel sociable any more. What’s the point going out to meet friends, if you’re going to spend $10 on gas and maybe $50 for a meal and drinks? But before you realise it, you get so depressed. That getting out of it results in a binge!

First off, include some allowance for fun when you make your budget. You’re going to need it, to keep your spirits up.

Second, keep your old friends - and make new ones. Tell them what you’re doing. Don’t worry about looking like a fool - you aren’t. Friends will understand what you’re going through; you’ll find some of them come up with ways to help, that you wouldn’t have thought of on your own. If you’re still afraid to talk about it, just say you’re going through a bad financial patch, without details.

An interesting variation is to open up on the Internet. Quite a few blogs out there from people who’re fighting debt. You’ll find suggestions to economise, ways to deal with problem situations, and if nothing else, moral support. You could do it anonymously, too.

Celebrate.

Along the way, you’re going to find your life changes in many ways. You’ll also probably give up a number of things that cost money, because you find it pinches.

What pinched me most when I went through my bad patch, was giving up books and music. I used to buy a couple of books each month. And maybe a disc or two. But I didn’t need to - and I needed the $50 more.

So we substituted. With the library, and the radio. But along the way, we also decided. Each milestone we reached, we’d celebrate. For me, celebration was buying 1 book. Or disc. Not more than $20 - and only after reaching a milestone. But that helped. Everytime I crossed a bookstall at the airport, or downtown, and saw something I liked - I’d just note down the name, and add it to my celebration list. I did end up buying a few of them, down the line.

So celebrate each victory. And with each celebration, repeat these steps. To make it easier to win the next battle, or milestone.

For each small battle won, means you win the war.