Best investment? Paid-off debt

Sure, stocks are much cheaper now than they were at the first of the year. So are houses.

But if you're carrying a lot of credit card or other debt, your best investment is to pay down that debt.

Think of it this way: If you invest $10,000 in a 10-year Treasury note, you'll earn 3.36% a year, or $336. After 10 years, you'll have pocketed $3,360.

Now, for the sake of comparison, let's say you have a $10,000 credit card bill, and the card charges a 19% interest rate. Suppose your card issuer requires you to pay 4% of your balance every month, so your minimum payment is $400.

If you pay your minimum each month (and assuming you must pay at least $10 a month), it will take a bit more than 15 years to repay your debt. If you pay that debt off now, over 10 years, you'll save $15,672 in payments and $6,204 in interest. Put another way: You'd earn $336 in interest from your T-bill in your first year. But you'd save an average $350 a month the first year by paying off your credit card — clearly a better bet.

Unfortunately, most people don't have $10,000 sitting idle; that's just one reason they're facing a mountain of credit card debt. Still, even if you pay down your debts gradually, you'll free up money for investing later. Just be careful not to dig yourself a bigger hole than you started with. Here are five ways to help get out of debt — and five traps that would probably bury you even deeper.

5 ways to climb out of debt

1. Stop using your cards. It won't do you much good to pay down your debt if you keep adding to it. If you've arranged to have some recurring charges automatically billed to your credit card, see if you can have those bills deducted from your checking account instead. (Be sure to keep track, to avoid overdraft fees on your checking account.) Or see if you can eliminate those bills altogether.

2. Try to get a better rate. Some cards charge 30% or more, and anything you can do to reduce your rate is to your benefit. Start by calling your credit card company, says Gerri Detweiler, an adviser at Credit.com, a consumer website.

"Be pleasant, but be persistent," she says. As you can imagine, the odds aren't great that you'll be rewarded with a lower rate, but it can't hurt to ask.

Should you transfer balances to a cheaper card? Possibly, Detweiler says. But bear in mind that opening new accounts can weaken your credit record. If you can, transfer your balances to a lower-rate card that you already own.

You might also consider a home-equity loan, which would give you a lower rate — and your interest will be tax-deductible. If your home's value has slid precipitously, though, you might not be able to get one. And if you start using your credit cards again, you'll find yourself with even more debt.

3. Pay off cards with the highest interest rate first, and pay more than the minimum.

Suppose you have a $10,000 credit card bill that charges 30%. Your minimum payment is 4% of your total, or $400, and $250 of that payment goes to interest. Even after sending $400 to your credit card company, your balance falls by just $150. (The same payment to a card that charged 12% would reduce your balance by $300.)

The faster you get rid of your high-cost debt, the better, so try to pay more than the minimum. One good source of money: your tax return. The average taxpayer received a $2,225 refund from Uncle Sam last year. That kind of money could go a long way toward paying down your debt.

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