How Young Adults Can Whittle Down Debt

What can you do about all that debt if you're young and struggling on limited income?

Organize and budget. Review all of your debts, regular bills and income to see where your money is coming from and going to. Are you paying your bills on time and are you paying at least the minimum every month -- preferably more?

Establish a simple budget. Prioritize your expenses -- rent, groceries, transportation, loans and other expenses you have to meet every month. See what falls toward the bottom that you can do without or at least cut back on.

Get a free credit report. Ask for a free credit report from each of the three major agencies. Check the reports for accuracy and make sure the credit scores don't differ much from each other. The shock of the reports also might motivate you to start cutting debt.

Watch those credit cards. Beyond debt you may already have accumulated on your credit cards, are you adding to that debt with purchases for short-term needs such as groceries, meals out and clothing? Stop! Switch to a debit card, checks and cash. It's easier to restrain spending that way.

Is the interest rate you are paying high? Consider switching to a lower-rate card, even if that rate is offered only for a limited time (at which point you can switch again). Watch for costly transfer fees, however.

Pay costliest debt first. Usually it's best to tackle the costliest debt first. For young people, that typically means making the minimum payments for the lower-rate college debt and perhaps a car loan, while paying down credit card debt faster.

Consider consolidating student loans. The interest rates for consolidating federal student loans dropped to historic lows in mid-2004 and will remain there through June 30, 2005. After that, with overall interest rates rising, rates could start climbing again.

But be careful how you consolidate. By extending the loans beyond ten years, you lower monthly payments, which may be necessary, but you will end up paying more interest over the life of the loan.

Avoid bankruptcy. Bankruptcy rates are up 19 percent from 10 years earlier for people age 25-34, according to Demos. A major cause is young people with no medical insurance but high medical bills. But bankruptcy stains your credit record for 10 years, so avoid it unless you're sinking deeper into debt and see no realistic way out.

Negotiate with creditors for lower interest charges and longer repayment terms, or get help from a reputable credit counseling service (the field does have rip-off artists).

Generate more income. If debt is weighing you down badly enough, you may need to moonlight at a second job until you can get it under control. Some experts suggest working with your parents, though you don't want to hinder their ability to meet their own needs, such as saving for retirement. Some suggest that parents help out for such things as auto or health insurance but let their children remain responsible for their debts.

Tips courtesy of the Financial Planning Association.