Debt Repayment Strategies to Avoid

By Mike Peterson
In March 15, 2013

You probably know by now that I’m a pretty big advocate of responsible credit card use.  I don’t think credit cards are bad – but I do think that if you’re going to use them, you have to use them carefully and responsibly.  Don’t overspend.  Don’t treat them like cash or like an extra source of income.  And, most importantly, don’t carry a balance – you should be able to pay your balance off, in full, every month.


That said, I also know that lots of folks out there are struggling with serious credit card debt – I’m talking hundreds (or even thousands!) of dollars in high-interest debt.


There are a few ways to pay off credit card debt.  Some folks get part-time jobs or sell their stuff on ebay.  Some folks use their talents and start side businesses – they take photos, decorate cakes, give piano lessons, and so on.  Some use their tax returns to knock big chunks off of their balances.  Others simply buckle down and create a plan (I recommend the snowball method) to tackle debt one credit card at a time.


And, unfortunately, some people turn to other methods, like payday loans or endless loops of balance transfers.  Some of these credit card quick-fixes end up being more trouble than they’re worth.


Trying to pay off your credit card debt?  Here are five strategies to avoid (or use with caution):


1.  Payday loans.  Payday loans are short-term, very high-interest (depending on the lender, you could wind up paying anywhere from 350 to 700 percent) loans that provide you with a few hundred bucks on short notice.  Of course, if you have a very high credit card balance, you probably can’t pay off your debt with a payday loan.  And, even if you could, you’ll pay sky-high interest.  Payday loans are never, ever a good idea – they should be avoided at all costs.


2.  Borrowing from family.  In theory, it sounds like a good idea:  Get a loan from Aunt Sally to pay off your credit card – and then simply make no-interest payments to her instead of your credit card company.  But what happens if you miss a payment to Aunt Sally?  Family gatherings could get awkward.  While I wouldn’t put this method in the same category as a payday loan, I’d still recommend that you try to find other ways to pay your debt before you turn to family members.


3.  Irresponsible balance transfers.  Used responsibly and carefully, balance transfers can help you secure a lower interest rate on a credit card with a high balance – which can, of course, help you pay down your debt faster.  The problem is, though, that it’s pretty easy to abuse balance transfers or use them irresponsibly (in many cases, folks start spending on the new account and rack up even more debt than they originally had).  Plus, most credit card companies charge some kind of balance transfer fee – usually a percentage of your total balance.  And finally, balance transfers usually come with a deadline:  If you don’t pay your balance off, your interest rate goes up.

Bottom line:  Be careful with balance transfers.  If you don’t think you can pay your debt off in time – or if you don’t think you can stop yourself from using your new line of credit – don’t use this method.


4.  Taking money out of retirement.  It’s tempting to dip into your 401k plan or withdraw from your IRA to pay off your credit card debt – but it’s not something I’d recommend.  After all, you’re just stealing from yourself:  The less you’ve got put away in retirement now, the less that there is to grow over the years.  What’s more, you’ll wind up paying taxes on any money you take out – the government charges you regular income tax on any premature withdrawals, plus a 10 percent penalty for early withdrawal.  Instead of taking money out of retirement, consider reducing your monthly retirement contributions until your debt is paid off.


5.  Making minimum payments.  This is basically like doing nothing.  Making the minimum payments will ensure that you pay hundreds (or maybe even thousands!) in interest – and you’ll be paying for a long time.  A very, very long time.  How long?  You can see exactly how long it will take by using the Federal Reserve’s Credit Card Repayment Calculator.  If you want to get out of debt, you need some kind of long-term repayment plan that goes beyond the minimum monthly payment.


Have any debt-related success stories?  Are there any debt repayment strategies that you think should be avoided at all costs?  I’d love to hear about them!

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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