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How to make headway on debt the smart way

Credit card debt is a rough topic for a lot of Americans. It's easy to get into -- especially if you hit a difficult financial patch and find yourself relying on credit cards for basic necessities.

The average American family owes around $16,000 in credit debt -- which may be good for the economy but it's bad for the consumer. Credit card debt is the kind of debt that produces more debt -- interest charges add up and tack on more expense over time. The longer it takes you to pay off your cards, the more you actually end up paying.

Experts say that if you're ready to start tackling credit debts, it's important to have a plan. While getting rid of those credit card payments is important, it's not the very first goal you need to have. You need to approach your financial woes in a specific order:

First, start building an emergency fund. You need enough money to cover a minimum of three months of your living expenses (including credit card payments). It's even better if you have six months set aside. Realistically, you may need to start small. However, a piggy bank for your change, loose dollar bills and a $50 every payday will add up faster than you think and can turn into a real savings.

Next, look at your debts -- loans and credit cards alike -- and determine which have the highest interest rates. Those are the ones that you want to be rid of first. While some people say you should always save before you pay off debt, there's no savings account that will provide you with a 19 percent to 26 percent rate of return. When you pay off a credit card with that kind of interest rate, that's what you're "earning" by putting the money there.

Worry least about long-term goals like a new car or home. Unless your current car is falling apart and getting a new one is going to become important, that's the least of your worries. The loans you will eventually take for those are also considered "good" debt because they're secured and generally viewed as either an investment or necessary.

If your credit card debt has become unmanageable and you're unable to afford even the minimum payments these days, it's wise to learn more about your legal options, like bankruptcy.

Source: The Motley Fool, "When Paying Off Credit Card Debt Is the First Thing You Should Do," Maurie Backman, Nov. 02, 2017

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