Five Ways to Downsize Your Debt

Fools, I just finished reading a great book. Andrew Feinberg's Downsize Your Debt: How to Take Control of Your Personal Finances is quite possibly the funniest book I've ever read about personal financial planning. How contrary -- personal finance with spirited humor -- too Foolish! For many, that isn't saying much, but I think it's a distinction to be proud of. If you can't engage people, you can't teach them -- it was as true in high school as it is today.

Now, the book is a touch dated in places (having been published in 1993), but on the whole it is filled with excellent advice. I can already hear some of you saying, "Oh no, he's talking about debt again. This guy always writes about debt in my Rule Maker column." But, I have to give it some due -- after all, debt is nasty. It can sneak up on you, and it'll kill your investment returns faster than you can say "bear market." The benefits of having no debt, or declining low-rate debt, are central to the Rule Maker philosophy.

With that in mind, here are a few of the highlights from Downsize Your Debt:

1. Know Thyself: Get and view your credit report. The fee varies by state, but is generally around $8. Links to the three main credit bureaus are down at the bottom of this article. Getting a look at your credit report is worth it.
   
   
2. If you want long-term debt, there are many better options than credit cards. Never put charges on there that you don't have a clear plan to pay off. Credit cards should be used only for short-term lines of credit.
   
   
3. Never think in terms of minimum payments. Always pay more than the minimum payment. As we advise in our area on Getting Out of Debt: Don't Pay By Their Rules! Prepay. (Whether you agree with this or not, Feinberg makes a pretty compelling case for the mass psychological benefits of learning how to live out of debt, before learning how to use debt.)
   
   
4. Getting debt consolidation loans when one hasn't addressed (and constrained) spending habits ultimately make things worse. Transferring your credit card balance into a home equity loan and then running up your cards again sounds lunatic -- but has proven more common than lunacy.
   
   
5. Generally, the best interest rates are advertised the least. It's a bit like the index fund versus managed funds -- fees are held down when there isn't a huge advertising budget. So just remember (or remind your outgoing college freshman) that banks aren't blindly mailing you credit cards or loan offers that make a lot of sense for you.