Recovering From Debt Overload

Dear Alpha Consumer,

I was doing OK financially and paying off all my credit cards until I lost funding for my job retraining program. I've also recently had to pay for major vehicle repairs and my father-in-law passing away. Now, I'm carrying debt, and my husband works erratic hours and takes our only running vehicle. I'm trying to find a job online to help. We don't have any assets to sell.

Here is my question: With debt on multiple credit cards, all of which are at various interest rates, where should I put extra cash above and beyond the minimum payment? Should I pay down the card with the highest balance, which also carries the lowest interest rate? Or pay down the card with the highest interest rate and lower balance? Another option is paying down the cards that carry debt exceeding 70 percent of the credit limit.

Under normal circumstances, I happily live below our means, and we were doing so until several major blows, some of which I mentioned, hit our family. If you have any advice, barring winning the lottery, anything illegal, or filing for bankruptcy, I would most appreciate it.

I'm sorry to hear about your series of hardships, which sound as if they have placed a huge financial burden on your shoulders. Although climbing out of debt, especially while still looking for a job, is never easy, there are some smart ways to do it.

You've already gotten on the right track by planning to make more than the minimum payment on your cards, to keep your debt from piling up further. I asked Bill Hardekopf, chief executive of LowCards.com, for advice on how to decide which card to pay off first. He recommends first checking the credit limit on each card, because if you go over that limit, you will be charged an "over the limit" fee of around $30 per month. Even getting near credit limits, as you seem to be close to doing, can increase your interest payments.

Next, direct your extra cash toward the card with the highest interest rate, while making the minimum payments on the others. As soon as the first card is paid off, turn your attention to the one with the next highest interest rate. That way, you'll minimize the amount of money you're paying on interest.

It never hurts to call your credit card provider and ask for a lower interest rate. You can use a website such as BankRate.com to help you compare credit card interest rates and consider moving your balance to a different card. Be careful, though; such transfers often carry fees, so be sure to ask about that ahead of time.

BankRate.com also offers a handy calculator that can tell you, based on your balance and interest payments, how long it will take to pay off the card and how much you will have doled out in interest.

Meanwhile, take care to make your payments on time each month; failing to do so can lower your credit score. That can raise your credit card interest rates, which means you would owe even more money. Raul Vazquez, cofounder of LivingWithBadCredit.com, estimates that people with beaten-down credit scores often pay $500 more a month in interest than people with strong credit scores do. If you can improve your credit score, says Vazquez, "that is the equivalent of giving yourself a $6,000 raise."

• Readers, if you have any suggestions or have faced similar challenges, please share your comments below.

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• The Moolanomy blog offers an interesting and useful roundup of 2007's best personal finance blog posts.