Debtor determined to become debt-free needs a plan

Learn where you are, then take these steps to shed debt

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
I am determined to eliminate debt this year, including resolving all negative items reported on my credit reports. Can you send me a list or direct me to a website that lists local nonprofit credit counselors or services that can assist me? -- Tony

Dear Tony,
Congratulations on your resolution to pay off debt this year. Because you are among many, many others with the same resolution, I am glad you wrote in to give me the opportunity to weigh in on this topic. Losing weight, eating healthier and paying down debt are at the top of many people's New Year's resolutions.

Before you begin, you need to know exactly how much you owe. The best place to start is to pull free copies of your credit reports from each of the three major credit bureaus at annualcreditreport.com. Review your reports for any errors and dispute them with the credit bureau that reported it. You can do this online with each of the bureaus. Next, list all your obligations, including those that may have been charged off and are in collections.

Once you know how much you owe and to whom, you will need to create a spending plan so you know exactly how much you can realistically afford each month to pay toward debt reduction. One item that I'd like to see you add to your monthly expenses in your spending plan is a regular amount to be contributed to an emergency savings fund. Even if you can only afford to save $5 a week, start there and add to it as you can. The only way you can truly avoid unwanted debt is to have money available for those unexpected expenses that we all face each year. Your goal should be six months' living expenses in a liquid savings account with limited access.

Don't worry if you get overwhelmed with the process of creating a spending plan. You can contact a nonprofit, trusted credit counseling agency near you for assistance. You can find help near you from a member agency of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. Both of these associations require their members to adhere to strict standards of operation and consumer protections.

Your counselor will complete a thorough review of your finances and, based on your financial goals, can make recommendations for you. I imagine you have credit card debt included in the debt you would like to repay. If it makes sense in your situation, your counselor may recommend a debt management plan (DMP) that will assist you in paying off your credit card debt in three to five years. If you decide to enter into a DMP, be sure that you understand all the elements of the agreement and all fees associated with the program. AICCCA and NFCC members will not charge more than $75 to begin a program and no more than $50 per month to maintain your program. If you are quoted a large upfront fee to participate in a DMP, contact someone else.

I wish you luck in sticking with your resolution to pay down debt. One thing to keep in mind is that it will take more time than you would probably like, but if you do stick to it and don't add to your debt load, you'll make it and be really glad you did!

Take care of your credit!

See related: After creating a debt management plan, stick to it, Keeping New Year's resolutions: experts' tips, How to dispute credit report errors, 8 steps to picking a credit counselor

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: January 11, 2010

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