Great article from the Washington Post:

Sunday, December 31, 2006;

Background: Washington is single with no children. She is a recent graduate of Howard University and works as a concierge, assisting new apartment residents with settling in. She lives in the District with her mother.

Financial situation: Washington earns about $32,000 a year. She has about $1,200 in savings. Her debts include a Bally's account, which is in collections, and for which she owes $1,284; a Macy's account, also in collections, for which she owes $425; about $4,800 on a Visa credit card, which is now closed and also in collections.

New Year's resolution: To pay off all her debts and begin saving for a home. The plan: To get out of debt, Washington first needed to find out exactly what she owes. You would think this was easy, right? However, Washington had thrown away most of her account statements. So I had her pull her credit reports from all three bureaus -- Experian, Equifax and TransUnion. (Go to to get a free copy of your credit report every 12 months.) Initially, Washington asked me if she should get a consolidation loan to pay off the debts.

"So you want to use debt to pay off debt?" I said.

Once Washington had her credit reports, I asked her to call the listed creditors and find out how much she really owes. "I was scared to call them to work something out," she said.

After going over her income and expenses, I nixed getting a consolidation loan. Instead, I had Washington create a budget so she could see how much money could be devoted to her debts. Because she doesn't pay rent, doesn't have a car payment and her expenses are low, most of her net pay can go to paying off her credit accounts. Following my plan, she should be out of debt in less than six months.

I recommended she pay off the smallest debt first. To some it might make more sense to pay more on the debt with the highest interest rate. However, paying off the smallest debt gives you a sense of accomplishment. If you are not delinquent on your accounts, make the minimum payment on the higher interest debts while using any extra money to pay off the debt with the lowest balance. Once that's paid off, apply the cash to the next lowest debt.

After calling the collection agency for Macy's, she found out the company is willing to accept $319 to consider the account paid in full. I told her to use part of the $1,200 she's managed to save and pay off the account. The next step is to see if she can get a payment plan for the other two delinquent accounts.

Tough love: Amazingly, Washington told me she was planning a trip to Las Vegas in February.

"Not a chance," I said.

"But I'm paying with cash," she pleaded.

"You're paying with money that belongs to your creditors," I told her.

Washington agreed to cancel the trip.

I gave her a high-five. This is how you begin to change your attitude about your finances. You aren't entitled to a vacation if you are behind on any of your bills or if you're carrying a credit-card balance.