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SALT LAKE CITY -- A study for the Harvard Business Review says the average American family could get out of debt in 16 months as long as they don't spend any money on any other expense. But is there such a thing as a bad way to get out of debt?
When it comes to paying off debt, typically the first two steps are the same no matter who you talk to: Stop borrowing and eliminate your expenses. After that, it's up to you which of your debt to pay off first.
"We usually recommend the smallest balance first just because you can get it out of your hair and not worry about it anymore," said Preston Cochrane, with AAA Fair Credit Foundation.
Cochrane says a model known as the Roll Down Principle or the Debt Snowball Principle is very effective for many people. "Let's say you've paid off debt number one, it's completely paid in full. Then you take the money you were paying toward that debt and you apply it to the next one," he explained.
But this model may not work for everyone. If you have an account charging a very high interest rate, you could choose to pay that off first. It just depends on what you want.
What you don't want to do is get deeper into financial trouble as you try to fix your current problem. Cochrane warns that debt settlement -- where you settle with your creditor and pay only a certain percentage of your debt -- could be a bad idea for people who are current with their payments.
"To any potential lender, they're going to look at that and say, ‘Well, this individual settled on this account. Why would we open a new account for this person?" Cochrane explained.
He says your credit score could drop if you decide not to pay all your debt. This strategy works best for people who are already behind or in default. Cochrane says most creditors won't approve a settlement for people who are current on their payments anyway.
For some people, a debt consolidation loan could be problematic. "If you're addicted to spending, all of the sudden you've opened yourself up. You've got more leverage to be able to go out and charge and spend and next thing you know you've got another debt that you've added on top of," Cochrane said.
He says this tactic should be done by people who've reformed their ways and conditioned themselves not to use debt to live beyond their means anymore.
E-mail: pnelson@ksl.com
