Make a vow: No new debt

If you're struggling with debt, only one New Year's resolution matters: You need to make a vow not to add to the pile.

Getting a handle on debt is a key part of the plan to take control of your financial destiny that I outlined in "5 ways to dig yourself out in 2010." Once you have a steady income and have saved $500 to cushion yourself against minor emergencies, halting your debt pileup and making a plan to pay it down are your next priorities.

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But resolving not to take on new debt is trickier than it seems, especially if you're in the habit of using credit cards, payday loans or other high-cost toxic debt for dealing with life's inevitable road bumps.

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Here's what it means:

• You stop using credit cards. Millions of people use credit cards responsibly, charging only what they can pay in full when the bill arrives. Millions of others, though, carry balances from month to month. Until you're ready to join the first group, you have to put the plastic aside and start paying for purchases with cash or cash equivalents, such as debit cards or checks. Only with this kind of discipline will you really learn how to live within your means. So take the cards out of your wallet or purse. If you think you'll be tempted to use them, freeze them in a block of ice (although that might affect the magnetic strips on the back) or put them in a safe-deposit box at a local bank. Don't cancel the cards, though, unless you're truly unable to control yourself, as closing accounts can negatively affect your credit scores.
  

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• You don't apply for any new loans. This includes payday loans or advances, personal loans, car loans, home equity lines of credit, help from friends or relatives -- and even those "zero interest for 12 months" deals. If you can't pay in full when you buy something, you don't buy it. If you're accustomed to borrowing for "emergencies," you'll have to think about alternatives. If your car needs an expensive repair, for example, you might have to garage it until you've saved the cash.

• You don't buy a house. Interest rates are low, prices are bottoming out in many areas, and the IRS offers juicy tax credits to buyers. But with homeownership comes new, sometimes large and often unpredictable expenses. If you haven't learned to live within your means before you buy a house, homeownership easily could send you over the financial edge. Consider buying a house this year only if you can pay off all your toxic debt and save up the down payment before Dec. 31.

• You beware of refinancing and consolidation. "Refinancing" broadly means replacing one loan or debt with another. If you can do so in a way that reduces both your interest rate and the time you stay in debt, refinancing can make sense. Too often, though, people in debt refinance to loans that give them lower payments but stretch out the time they spend in the hole.

Continued: Change your bad habits

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