Great Advice

Americans carry $2.56 trillion in consumer debt, up 22% since 2000 alone, according to the Federal Reserve Board. The average households credit card debt is $8,565, up almost 15% from 2000. The average US student emerges from college carrying $20,000 in educational debt. Household debt, including mortgages and credit cards, represents 19% of household assets, compared with 13% in 1980. Share of disposable income that consumers must set aside to service their debt has risen to 14.5% from 11% just 15 years ago. US savings rate, which exceeded 8% of disposable income in 1968, stood at 0.4% at the end of the first quarter of 2008, according to the Bureau of Economic Analysis.1

Over the past few years, millions of Americans have refinanced their mortgages, often repeatedly, to take advantage of falling interest rates and to lower their monthly mortgage payments. Yet at the same time, millions are still carrying credit card balances with annual percentage rates (APR) of 18% and higher.

When you don't pay off your credit card balances in full at the end of each month, you're robbing your ability to save and invest for your future. In a report on the credit card industry for PBS, Elizabeth Warren, the Leo Gotlieb Professor of Law at Harvard Law School, argued that credit card debt makes it difficult for anyone to build a solid financial foundation.

Warning Signs
There is a severe lack of understanding about debt and personal finances today, according to New York Law School Professor Karen Gross, founder and past president of the Coalition for Consumer Bankruptcy Debtor Education. "We have equal opportunity ignorance -- it cuts across all levels of society," she says.

For a quick assessment of your situation, ask yourself these questions:

Am I making only the minimum payments on my credit cards?
Do I live from paycheck to paycheck with no savings?
Do I sometimes skip payments on one credit card in order to pay off others?
Have I reached the credit limit on one or more credit cards?
If you answered yes to any of these questions, you may need to take action to get back on track.

Stepping in the Right Direction
"It's essential to pause, take a deep breath, and look carefully at possible solutions," explains Gross. "The last thing you want to do is to try to relieve your financial headache with a solution that will be worse than the hangover itself." Like a New Year's diet resolution, quick fixes rarely work. What does work, according to Gross, is a simple four-step formula for financial H.E.L.P.:

Examine your situation. While your debt problems may be serious and appear urgent, first get an accurate sense of the extent of your problem. "Lots of organizations offer help, but don't take the first solution that comes along. Take time to assess, compare, and contrast multiple solutions," she says.

Pay at least the minimum amounts due on all of your credit cards. This last step is critical due to a new clause that has worked its way into the fine print of many credit card agreements. It's called the "universal default" clause and it permits a credit card company to raise your interest rate if you're late on another company's credit card or any other outstanding loan. Banks argue that it's logical to raise rates for a consumer who has shown evidence of becoming a higher risk.