Options to Avoid When Paying Off Debt

Pay 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

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About the author:

I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. You can connect via Twitter / Facebook.

18 comments on “Options to Avoid When Paying Off Debt

  1. Definitely cutting expenses and increasing income is the way to go to get out of debt. Seldom is there a quick fix to paying off debt. I concur that using home equity to pay off unsecured debt is a really bad move in my opinion.
    K.K. @ Living Debt Free Rocks! recently posted..Sunday High Fives! Special EditionMy Profile

    • I would agree. The only time I would recommend them is if you need to keep your lights on or put food on the table (as I have known a few in this situation before), but definitely NOT a long term solution by any means.

  2. Hi John. These are helpful pointers in paying off debt. There is truly no sense in acquiring new debt while we are still in the process of dealing with old debts. A debt-free life is full of comforts so we have to choose that target even if it is difficult to achieve. Reducing expenses and earning more is also necessary for us to cope with the hardships of life.
    David @ Ottawa bankruptcy recently posted..Protecting Yourself from Debt Relief ScamsMy Profile

  3. The point about not using home equity to pay off debt is awesome. I have heard numerous stories about people using home equity to pay off credit cards then using their credit cards like they were mad as hatters. I wonder how many people lost their homes over the last seven to ten years because of this cycle?
    Jerry recently posted..Mortgage Refinancing Blunders To AvoidMy Profile

  4. Best advice! It seems so simple, but so many people are not willing to just cut their stinking lifestyles! It kills me when I hear people thinking they are making money also by “paying it off in full every month”. I fell into that trap and let it lapse just one stupid month. Yep, it took me a year to pay off that skipped payment.

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