Options to Avoid When Paying Off Debt
Plenty of people today have debt and getting out of it is the most important goal for them. Over time, debt grows making it larger, and more burdensome. To improve your financial condition, it’s essential to get rid of as much debt as you can – large and small. Tackle larger debts by paying them off over time and with larger lump-sum payments as you are able. Though there are loads of articles written specifically for people to help them to get out of debt, some of them can do more harm than good. Here are some tips which you SHOULDN’T follow if you want to make a debt-free life a reality.
DON’T Pay Off Credit Cards With Home Equity
If you want to pay off your credit cards with the help of home equity loan, then it’s better to forget about it. As you may know, there are two categories of loans: secured and unsecured. Credit cards are a form of unsecured debt, so you do not have to provide any collateral to get a credit card.
In the case of a mortgage, your house is a guarantee that a lender will still receive something if you do not have enough funds to pay off your debt. The lender gets the better end of the deal because he will recover his money by getting your home if you can’t pay back your loan. As you can see, this option is not worth the risk of losing a roof over your head.
DON’T Get in Debt While You’re Paying Off Debt
Accruing new debt to pay off existing debt may work in certain, rare, circumstances, but generally, this strategy does not get you any closer to reaching your goal of living a debt-free life. Well, you pay off one debt, but already get another one. If you need to make a payment on a high-interest rate loan urgently, there can be sense in borrowing money for a short-time period or applying for a loan as long as you pay off the loan right away.
Avoid the trap of paying off Pay Day Loans with more Pay Day Loans because it can cause your debt to spiral out of control and hemorrage precious income. If you do not pay off the loan on time, fees will be charged on the loan and it will become even more expensive. Be cautious about using Pay Day Loans, and use them to pay off the debt only if there’s an emergency and you have no other options for accessing cash quickly.
DON’T Borrow from your 401(K)
Borrowing money from your 401(k) follows the principle of borrowing from your personal savings now and paying yourself back later when your finances are in order. When you borrow money from a 401(k), an interest rate will eat up some of your savings as well. While this idea may look good on paper to some, in a reality borrowing from your 401(k) is not such a brilliant idea.
This money is intended to be saved for your retirement. If you use this cash, an essential point of saving and investing will be lost. By doing this, you are going to throw away approximately 30% of your money and mortgage your future retirement for today’s financial troubles.
DO Cut Expenses and Increase Your Income
The best way to pay off debt is to cut your expenses as much as possible and increase your income, through means such as a second job. Paying off debt responsibly and sensibly requires sacrifice and takes time. However, the goal of living a debt-free life is a worthy one.
Photo courtesy of: Sanja Gjenero