When it comes to debt, financial experts have typically marked both “good” and “bad” scenarios. But in today’s touchy economy, the lines are becoming blurred.

To avoid stacks of unpaid bills, many of us are turning to cash instead of pulling out plastic for purchases. That’s a smart move according to a recent study in the Journal of Experimental Psychology: Applied (American Psychological Association), which found fresh evidence that if you’re looking to curb spending, cold hard cash is the way to go. “The more transparent the payment outflow, the greater the aversion to spending, or higher the pain of paying.”

Sarah Evans, director of communications for Elgin Community College (ECC), has made a concerted effort to stick to cash these days in order to avoid debt. “My husband and I accrued a lot of debt right after college,” says Evans. “We used credit cards to make ends meet, buy our professional wardrobe, even for groceries. It took about two-and-a-half years of dedicating the majority of our financial resources to paying it all off.” Now, Evans and her husband pay cash or debit for major purchases. “If we decide to open a credit card to save money on a purchase, we pay it off the next month.”

Get Smart: Examining the Varying Degrees of “Good” Debt

There are some purchases that have long been deemed worth going into debt for – education, for instance. “Education is the one investment no one can ever take away from you,” says Evans. “It is not market-dependent, nor will it ever decrease in value. I am confident in my conscious choice to go into good debt for higher education.” Amy Perrin, director of student financial assistance at ECC, echoes Evans’ sentiment. When she advises students and parents about the cost of college, she asks they consider the benefits of having a degree.

Education is like any other venture, says Perrin, and you should compare the upfront financial obligation to the rate of return on your investment. “My experience has been that the rate of return far outweighs the risk,” she says. “I advise students to apply for financial aid early, research scholarship opportunities, and borrow only what they need to cover costs.” Coming from a community college environment with low tuition costs, Perrin feels confident telling students higher education is a profitable and wise opportunity.

But is it also wise to go deep into dept for a pricey education – believing that borrowing for your degree is a smart choice regardless of the cost? It’s not so simple, says Robert Pagliarini, president of Pacifica Wealth Advisors, Inc. and author of the bestselling The Six-Day Financial Makeover. “Experts have said education debt is always good debt, but I completely disagree.” According to Pagliarini, it’s like saying food – any kind of food – is good. We all know that’s not true. It’s got to be the right kind of food. He feels going into debt to get a degree or to increase your skills is smart if it will translate into a better job and more money. “Do not borrow $50,000 just to get a degree that you’ll never use or that won’t move you forward. You’ll have a nice diploma, but you’ll also be plagued with debt for a long time.”

Even knowing her education-related debt was a necessity, Evans still intensely worried about her credit score when she and her husband purchased their house two years ago. “The night before we got our scores reminded me, ironically, of the anxiety the night before a college exam. Luckily, we didn’t have much to be concerned about. In my case, the credit score worry was situational (the purchase of a home). While it is not on my mind daily, my husband and I do our best to practice good financial habits.”

So What, If Anything, Is “Good Debt”?

According to Manisha Thakor, co-author of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, it’s worth going into debt for a house you can afford. For most people, this means buying a property that is roughly three to three-and-a-half times their annual household income.

Another debt-green light: A car to get you to work. If you must have one, says Thakor, the purchase price should ideally be no more than 30 percent of your annual income. Additionally, try to put 20 percent down on a loan that is no longer than five years.

Bottom line: The best kind of debt is debt you can afford. This means debt that has monthly payments sufficiently low enough that you can pay it down while meeting all your other necessary living obligations (and a few fun ones, too) with cash.

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In the past year, Chad, a 38-year-old former president of a social media communications company, has gained 30 pounds, seen his hair turned gray, and confesses that both his blood pressure and cholesterol have increased. The cause is none other than the economy. “The economic downturn hit us early last year when people stopped paying,” he says. “We had a mountain of uncollectible outstanding invoices.”

Like many Americans — eight out of 10 people, according to a recent poll by the American Psychological Association — Chad cites the economy as a significant cause of stress. He’s gone from being an affable, easygoing guy to a hardened bill-collector who rarely laughs, he says. Along with his health, his bank account has taken a major blow: he is currently $380,000 in debt and is dealing with the fallout of failed funding on a million-dollar project.

How Your Health Can Circle the Drain

It’s no surprise that debt with little revenue can send your health plummeting alongside your credit score. After all, says New York-based clinical psychologist Deborah Serani, money is more than just dollars and cents. It offers intangible feelings of security, power, independence, and freedom. “When our financial bedrock is shaken, not only do the numbers dwindle lower, but so, too, does our ability to cope with life issues,” Serani says. “Maxed out credit cards, unpaid bills, and mounting cash flow problems shake up our world.”

According to Serani, our bodies crave predictability. When we are taken by surprise or burdens or trauma creep in, it sets our neurobiology into a “Stress Response Cycle.” “Stress becomes dangerous when it interferes with your ability to live a normal life and do everyday things,” explains Serani. Chronic stress, which can lead to heart attack, high blood pressure, stroke, impaired memory and cognition, lowered immunity defenses, agitation, and depression and lethargy can wreak havoc on your emotional and physical health, she explains. “It can be lethal.”

Sick and Tired of Being Sick and Tired

John, CEO of an Internet media and marketing company, is carrying some pretty hefty weight on his shoulders, too. Worries about his financial future and the livelihood of his employees are all but dragging him down. Despite dwindling ad revenue, he’s determined to keep his company afloat. “If I fail, I fail everyone,” he says. “I do have days where I am physically sick.”

John’s lifestyle has become so unhealthy, he says, that vacations are always about getting back, and time off is spent calculating what he can accomplish upon return, a far cry from how things used to be. “I remember stretching every last second away from the job,” says John. That meant downtime whenever possible and leisurely lunch breaks. “Now, I almost don’t have time to leave to eat. I don’t want to go.”

Red Flags and Feasible Solutions

So, how can you keep your health in check during these tough times? Quoting Shakespeare, “Nothing is either good or bad, but thinking makes it so,” says Kathy Caprino, founder and president of Ellia Communications, Inc., a work-life coaching and consulting company. Caprino, a trained psychotherapist, says, “Debt will wreak havoc on your physical and emotional health if you continue to beat yourself up over it.” Her advice is “mind over money (matters),” with three sanity-saving strategies to be taken in sequence:

• Step back to gain an empowered perspective about the root cause and the behaviors, assumptions, and beliefs that got you where you are. Look at the cause of your debt or your financial situation. Get help from outside people who can see a future vision and won’t contribute to your self-blame or feed your fears.
• Let go of what is holding you back – the beliefs, actions, and patterns that are keeping you stuck and feeling small. If you’re in a mound of debt from overspending, examine the behaviors that tricked you into thinking true security was somehow outside yourself, such as your high-powered (and high-paying) job. Pinpoint what you need to let go of so you can move forward.
• Say “yes” to the compelling vision that you have about your next chapter in life. This can include emerging from debt, finding a new job, or developing more security in your current one. Accomplish your goals by taking action steps: seek out a financial consultant, mentor, or coach who can help you make a solid plan to turn your scenario around.

“Our physiology has a way of letting us know when things become too much to handle,” says Serani. When agitation, lethargy, and headaches occur frequently and are accompanied by feelings like despondency, helplessness, or anxiety, a stress response may be in its beginning stages. Says Serani, don’t skimp on the good stuff. “Remember to exercise, eat healthy, and involve yourself in social activities. And, if you find yourself tired and exhausted, give yourself the rest you need.”

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see part 1: The Descent into Credit Card Debt Hell

Here’s Mint’s advice on how you can lift yourself out of the abyss.

Here’s Mint’s credit card guide to help you lift yourself out of the abyss.

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Paul Keleher

As the credit crisis winds toward its inevitable conclusion, the number of customers unable to pay off their credit card each month is swelling. And credit card companies, facing the very real possibility of customers defaulting entirely, are now willing to come to a settlement for substantially less than the amount owed. With the credit card companies ready to deal, here’s what you need to know to get your own personal bailout.

Credit Cards are Unsecured Loans

Credit cards are a form of unsecured loans. What does this mean in layman’s terms? An unsecured loan is a loan in which a borrower is not required to use an asset as collateral in order to receive credit. In contrast, secured loans (mortgages or auto loans, for instance) use collateral that may be repossessed should the borrower default on their payments. By the nature of their business models, credit cards and other forms of unsecured loans typically offer shorter payback terms and higher interest rates.

Bailouts for the Delinquents?

With the recent rise in unemployment and wage cuts, credit card debt delinquency has significantly increased and shows little sign of slowing down. So what’s a credit card company to do? Bail you out! If you fall into the delinquency camp, there is a good chance that you may be able to negotiate an agreement with your card provider to pay off a portion of your debt in exchange for them wiping out the rest.

Increasingly, consumers are reporting that they are getting offers from their card providers to wipe out debt in exchange for payments. Few creditors are admitting to the practice. American Express and Bank of America admit to deciding on a case-by-case basis whether to accept partial payments. Other companies are keeping their lips shut, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.

What not to do

Let’s be 100% clear. If you are NOT delinquent on your debt, it would be extremely bad practice to purposefully go into debt in the hopes to get a free ride and have your debt wiped out. There are no guarantees that any company will wipe out your debt, and the risks and costs associated with trying to pull this trick off are simply not worth it.

If you are delinquent, it would be equally as risky to go on a spending spree in the hopes that your debt will be forgotten. Be smart and ethical. Debt settlements can still show as a black mark on your credit history, and this is bad news for you. Debt settlement should be resorted to only at last option.

How to Settle your Credit Card Debt

You’ve done everything you can to get out of debt, but just can’t seem to dig out of the hole. Your only option is to settle. There is no exact science to settling debt with every credit card company, and a lot of your success will come down to your negotiation skills. This is tricky business and if you’re in doubt, you may want to consult with a lawyer or certified financial professional. Here are some suggestions if you’ve decided to go down this path based on stories that we’ve heard from others who have succeeded.

1. Stop making payments: if you’re paying off at least a portion of your debts, why would the credit card company have any reason to settle with you? Wait at least 60 to 90 days prior to making an offer.
2. Build enough cash to offer a settlement: at the same time you’ve stopped making payments, you’re going to have to have money on hand to make an offer. Perhaps you sell some of the luxuries that got you into this mess in the first place or get a second job.
3. Make your first offer: explain your situation and make an offer. 25% is a good starting point. The credit card company is probably not going to accept your first offer, so it’s good to start low. You may get a counter offer at this point – but be patient in your negotiations.
4. If you increase your offer, ask for more: ask for any black marks on your credit report to be removed in your negotiations.
5. Get it in writing: get your agreed upon terms in writing from the credit card company.
6. Make your payment: pay by money order and send via certified mail so that you can verify that you fulfilled your end of the agreement.
7. Tax significance: you will get a 1099 from your credit card company and must claim the forgiven amount as income on your tax return.
8. Learn from your mistakes: if you can’t get your credit history wiped clean, the ‘debt settled’ mark will stay on for seven years past settlement. This will result in you having difficulty getting good credit terms during this time. Learn from your mistakes so that this does not happen again.

For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.

Here’s Mint’s credit card guide and credit card calculators to help you manage your credit.