While paying off your debts is always a great idea there are a number of ways that many people use that unfortunately are not really in their best interest. One of the easiest ways to recognize a debt repayment method that isn’t very good is to think about whether the debt is going to be truly paid off when the payment method is complete. If it’s not, the method you’re thinking of using isn’t a good one.
When you’re thinking about different ways to get rid of your debt load you need to ask yourself if the solution that you’re going to use is quick and easy or if it will, in no uncertain terms, actually get rid of your debt. With that in mind, below with listed some of the worst and most expensive ways to pay off your debt. Our advice; avoid them if at all possible.
- Borrowing from your 401(k) to pay off your debt. Simply put, you shouldn’t take money out of your 401(k) for any reason, especially to pay off a debt. When you do, it’s possible that your employer may actually no longer allow you to contribute to it again until you’ve repaid the money that you borrowed. Your take-home pay is going to be less as well until you actually pay that money back and, if you happen to lose or leave your job before the money is paid back you’ll be forced to pay back the entire loan immediately or be hit with massive early withdrawal fees and also income taxes.
- Refinancing your mortgage to pay off your debt. This is another really bad idea, and if your debt is unsecured it’s even worse. Simply put, tying a bad debt to the equity in your home is a bad move. Think about it this way; if you can’t pay your credit card debt you’re going to end up damaging your credit rating quite badly. If you secure the debt with your home and you can’t pay back the money not only will you damage your credit rating but you risk of losing your home as well.
- Using a debt settlement company to pay off your debt. Many people seek out debt settlement companies when their finances take a turn for the worse but, in most cases, this actually will make the situation worse. The reason is that, when you use a debt settlement company, you actually have to stop paying your creditors. As soon as your payment stop the phone calls from your creditors and also collection agencies will begin as well as negative entries on your credit report. When you hit 30 days late, 60 days late and longer you end up trashing your credit score long before your account is actually charged off. Also, there’s no guarantee that any of your creditors will agree to any settlements proposed by your debt settlement company, leaving you with the risk that you go through all of that hell and still owe the same amount of money.
- Consolidating your debt with a high interest loan. If you can get a loan at the right terms, debt consolidation may actually work for you. If however the only loan that you are able to get as an interest rate that’s higher than the average of the credit cards that you have debt on, you may want to forgo this one. And while your monthly payments may actually look lower it’s only because the time. For repaying has been lengthened. Once you add up the actual interest that you’re going to pay over the life of loan you’ll realize that you’re going to actually spend more money than if you had consolidated loan to begin with.
- Transferring the amount you owe to other credit cards. The only time that actually makes sense to transfer balances from one credit card to another is when you find a card with a very low introductory rate and you’re able to pay off the balance before that rate expires. If you can do this and you’re not going to use the card to make any extra purchase or take out the new cash advances then you should be fine. If however you can transfer your balance under these ideal conditions then you definitely want to skip this one as well. Also, in most cases the balance transfer fees may mitigate any actual savings that you may have.
Again, paying down your debt is an excellent idea and something that you definitely should try to do as quickly as possible. The 5 methods that we have discussed above however should be avoided if possible because, in most cases, you may actually end up paying more money and damaging your credit at the same time. If you have any questions about debt consolidation or other financial tasks please let us know and we’ll get back to you as soon as possible.