8 Worst Debt Pay Off Tactics

By Mike Peterson
In July 30, 2015

Paying off credit card is always a good thing – but when it comes to how you pay off your credit card, not all payment methods are created equally.  Some payment methods should be used with extreme caution.  Some should be avoided altogether – even if you have to stay in debt little longer.

Surprised to hear me say that?  You shouldn’t be.  While I’m all in favor of working toward a debt-free lifestyle, I’m definitely not in favor of quick fixes or short-term solutions.  I’ve written several blogs about good debt repayment strategies (like this one or this one) – so I thought it was time to talk about a few of the not-so-good ones:

  • Borrowing against your home.  This sounds like a good idea, but it’s incredibly risky.  Credit card debt is “unsecured” debt, which means that it’s not tied to anything tangible.  If you fail to pay back unsecured debt, you’ll hurt your credit score.  A home loan (or even a car loan, for that matter), is “secured” debt, which means that if you go long enough without making payments, the bank can take your home away.  When you use home equity to pay off debt, you’re basically converting unsecured debt to secured debt – which can be problematic if you have trouble making payments down the road.
  • Selling necessary stuff.  I’ll qualify this by saying that there’s nothing wrong with getting rid of some old junk on eBay or selling unwanted and/or unused items to help free up some extra cash.  I’m totally fine with the idea of liquidating assets to pay debt.  In general, my feeling is that, if you can do without it, sell it.

But before you start selling everything you own, make sure that you don’t go overboard.  For example, if you commute to and from work every day, you probably don’t want to sell your car (unless you have access to good, reliable public transportation).  If you telecommute, you probably shouldn’t sell your computer or your cell phone.

  • Abusing balance transfer offers.  There’s a case to be made for the responsible balance transfer.  Most balance transfer offers come with some nice perks, like zero (or very low) interest rates for a set amount of time, which can help you take a bigger chunk out of your principal balance.  But balance transfers also come with fees.  And because they move debt from an old card to a new one, balance transfers provide an opportunity for you to rack up new debt on your old card.

If you think that you can pay off your entire balance transfer (or at least a huge chunk of it) during the introductory period – without taking on more debt in the process, go for it.  But if you have any doubts about your ability to use a balance transfer responsibly, this strategy probably isn’t a good fit.

  • Gambling.  Just … no.  This is never a good idea.
  • Payday loans.  Where do I start?  First of all, it’s unlikely that a payday loan will cover an entire credit card balance – most payday lenders cap loan amounts at around $1,000.  But that’s not the problem.  The problem with these loans is that they come with unrealistic repayment terms and ridiculously high interest rates that make even the worst credit card terms look pretty darn good in comparison.

Another huge problem with payday loans?  Most people who use them get stuck in a never-ending cycle:  They can’t pay off the initial payday loan on time, so they have to renew it, which leads to more debt and more interest fees.  It’s best to just steer clear of payday loans entirely.

  • Raiding your 401k.  This is a tempting option, especially if you’ve got a significant amount of money saved up.  But I recommend that you avoid borrowing from your retirement.  You have to pay the money back within five years or you pay a penalty.  And if you change jobs or are laid off, you’re responsible for paying the entire amount back right away.  What’s more, you’re not earning interest on the money you take out.

It’s also important to remember that if you opt to take a payout prior to retirement, you’ll get hit with a 10% tax penalty on top of the regular taxation that the payout may incur.

  • Borrowing from loved ones.  Sure, it’s nice of Aunt Lucy to offer you an interest-free loan to pay down your debt – but what if something happens and you can’t afford to pay her back?  It’s really better to keep your finances separate from your relationships with family or friends.
  • Declaring bankruptcy.  Bankruptcy is pretty much the bottom of the barrel as far as debt solutions go.  It’s a complicated process, and it seriously damages your credit score.  You should only consider this if you truly, honestly have no other options (and there’s almost always a better option).

Remember, no matter how much debt you’re facing, there is hope.  There are good debt-repayment strategies out there.  The important thing to remember is that the path to a debt-free life starts with changing your behavior and your relationship with money.

Need some help getting started on your debt repayment journey?  Contact the Debt Guru team today for a free debt consultation.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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