Using credit cards randomly and not making the payments or taking out a payday loan and not paying it back can rack up debts. It's easy! But, not paying back debt accounts can be dangerous for your personal finance. You need to follow proper debt payoff strategy to get out of debt clutches. Otherwise, your debts can make your financial life even worse.
Paying off debts in a wrong way can end up with more hazards. Wrong debt payoff method pushes debtors to fall into debt grave again. How?
Here you go!
1. Taking out a payday loan to repay debt
Payday loan comes with high interest rates. Sometimes, payday loan interest rate surfeits 400% annually.
Taking out a payday loan with a massive interest rate is a foolish decision. Some payday loan companies are not authentic and can trap or fraud you using your account details. You can get quick cash, usually about $300 to $500, and in exchange of more debts. So, be aware!
If there are no other alternatives open to you to pay back your existing debts, then you have to consider some important factors before taking out a payday loan like:
- Say no to the payday loan companies who ask for your bank details to get repayment directly from your bank account.
- Examine the charge carefully to know exactly how much you’ll have to pay back. Know the repayment term beforehand.
- Take a close look at your financial ability to know whether or not you can afford the payday loan.
2. Cheating on retirement savings can invite future debt
Robbing money from 401(k) or other retirement savings to pay off debts is a bad idea.
Why?
The reasons are many.
First of all, you have worked hard to build up a fat retirement saving for your future.
Secondly, withdrawing money before the time means all your hard work will go to waste.
Moreover, you need to pay 10% penalty fees for an early withdrawal from 401(K). You will also be taxed for the amount withdrawn.
3. Tapping a home equity loan won't fix the debt issue
According to CoreLogic, a provider of property information and analytics, "About 4 million homes, or 8% of all residential properties with a mortgage, were in negative equity (the homeowner owes more on the property than it is worth) during the 1st quarter of 2016". One of the main reasons for the result is tapping home equity loan for paying off credit card debts.
Misusing a home equity loan to pay off debt is not a great move because you're putting your home at risk. Many people take advantage of home equity loan and then rack up more debts, leaving themselves in a worse financial situation than before.
Harrine Freeman, the CEO of Freeman Enterprises, a credit repair and financial counseling service said, "If you make a late payment, your interest rate may increase. This is only a temporary solution because you could easily get into debt again."
Remember, the mountain of debts are the outcome of your overspending nature. If you don't learn how to manage credit cards properly, you will rack up debts again.
A home equity loan can't fix your debt issue permanently. If you can’t afford the repayment, then you may put your home at the risk of foreclosure.
4. Opting for cash advance is only racking up more debts
Taking out a cash advance to pay off other debts is another dangerous financial move. Again you’re taking help of an expensive way, just like payday loan, to pay off your debts.
Remember, credit card cash advances come with 10% points higher than the standard interest rate. Also, you need to pay a certain percentage of the fee for the transaction.
Hence it is proved that debt pushes a debtor to fall into the debt cycle.
So, don't think there are some shortcut ways to get rid of painful debts. To get rid of those painful debts, you need to follow the right path instead of those dangerous routes.
Becoming debt free is not easy , but following the right strategy can make it possible.
Some quick advice for you to get rid of debts forever.
- Live within your means - At first, you should change your spending spree mentality. By doing this, you will be able to reduce expenses.
- Consider financial knowledge - Learn how to manage money as well as how to become a responsible credit card user.
- Have a plan - Formulate a budget and create a spending plan according to your income and expenditure.
- Seek professional help - Set aside a certain amount of money each month. Once you are able to do that, you can consider credit counseling to get the best debt relief strategy. The credit counselor will advise you whether or not a debt management plan is required.
- Choose the right strategy- If your debt amount is not huge, you can pay it off without seeking professional help; only you need to practice good money habits to save money. After then take advantage of some effective DIY debt relief options like debt snowball, debt avalanche, and balance transfer to pay off your debts forever. Good luck!
