10 Worst Ways to Pay Off Your Credit Card Debt
Do you find yourself swimming in debt? Are you willing to do whatever it takes (within reason) to rid yourself of this debt as a means of getting your finances back on track? (See also: Which Debt Repayment Strategy Is Best for You?)
If you answered yes to both these questions, don't do anything just yet. There are good ways to pay off your debt, and bad ways.
It goes without saying that the best way to pay off your debt is with cold hard cash. For example, if you have a $10,000 credit card bill, there is nothing better than using available cash, month in and month out, until your balance is gone.
But if you don’t have the savings, you might be tempted to look for "quick fixes." However, these often end up causing more harm than good.
1. Credit Card Cash Advance, AKA "Credit Card Shuffle"
This is a great idea, right? Wrong! Don't get fooled thinking the rate for a cash advance is the same as your standard rate. It's usually much higher, and often doesn't come with a grace period. (See also: How Your Credit Card Statement Keeps You in Debt)
2. Borrow From Your 401(k)
You should never consider tapping into your retirement funds until you hang up your work boots for good. Even more so, you definitely don't want to do this as a means of paying off your debt. When you borrow from your 401(k), you have to pay the money back sooner or later (or pay taxes and a penalty).
3. Borrowing From Family or Friends
The problem is simple: If you don't repay the loan, on time or at all, it could strain your relationship. Is that a risk you are willing to take? (See also: Borrowing From Friends Can Kill Your Relationship)
4. Borrowing Against a Life Insurance Policy
There is a right way of doing this and a wrong way of doing this. If you go down the wrong path, this is one of the worst ways to pay off your debt.
When you borrow against your policy, you can get the money you need to pay down higher interest debt. The problem is this: If you don't pay back the money before you die, the outstanding balance will be deducted from the death benefit. Subsequently, you leave your family in a bad spot. (See also: How to Buy Affordable Life Insurance)
Since you never know what the future holds, you may want to put this idea on the back burner for the time being.
5. Cashing Out Your Retirement
This goes along with point #2 detailed above. Some people go one step beyond taking a loan and decide to cash out some (or all) of their retirement account. This is your right, but you need to be aware of the consequences:
- You will pay taxes on the withdrawal;
- You will be penalized if you take the money before the appropriate age;
- You will forego the growth potential of the withdrawn funds AND the funds you pay in penalties and taxes;
- You are jeopardizing your ability to retire at your target age.
6. Consolidate With a High-Interest Loan
Consolidating your debt under one "umbrella" loan may sound appealing, but doing so with a high interest loan can leave you in the same position (or even worse). Sure, you will only have one payment and one lender, but in the long run you may end up paying more money.
Don't look at the monthly payment, which may be lower than the sum of your totals. Instead, look at how much you will pay over the entire repayment period.
This is a solution for some, but only if you can get the loan at a favorable interest rate and term. (See also: Why You Don’t Need to Panic About Your Federal Student Loans)
7. Using a Home Equity Loan the Wrong Way
This is one of the most common mistakes, since many people have equity in their homes but not much cash in the bank. With credit card debt, for example, you can get hit with interest and your credit score may even be dinged, if you make late payments, but it is not attached to your home.
Be careful, too, about using home equity to fund your lifestyle as opposed to funding wealth generation, such as home improvements or education costs.
8. Selling Everything You Have
Can you imagine selling all (or most) of your belongings as a means of paying off debt? From your big screen television to your car, you liquidate it all to get out of debt.
This is one of the worst ways to pay off debt if there's any likelihood you will go right back out and buy these items again on credit.
9. Filing Bankruptcy (Unless Absolutely Necessary)
It is easy to believe that filing for bankruptcy will solve all your issues. But did you know this can remain on your credit report for up to 10 years? Unless it is your absolute only option, avoid this at all costs.
This is not an option for those who are dealing with small amounts of revolving debt; however, it is a responsible choice for those with serious debt and no other options. (See also: Things to Avoid Before You File Bankruptcy)
10. Turning to a Debt Settlement Company
These companies do a great job selling their services, but they don't bring much to the table in terms of benefits. There are many issues with this strategy, including the fact that you will be charged a high fee for the service. On top of this, after your debt is settled your credit score will be much lower, and you may owe the IRS quite a bit of money (settled debt counts as income).
Note: There is a big difference between debt settlement companies and non-profit credit counseling. Non-profit agencies are more legitimate and many will work with you free of cost.
The lesson in these 10 examples is that if you find yourself in debt, don't rely on any of these methods of digging your way out. There are better ways to do it. It may take longer, and a lot more work will likely be required, but you'll be better off in the long run without creating another problem along the way.
Any other wrong ways to pay off debt? Let us know in comments!