Making the decision to get out of debt is a commendable step for anyone to take.
However, there is a right way and a wrong way to get out of debt. And just as it took some time to accumulate that burden, it will likely take a good deal of time to get rid of it.
The thing to keep in mind is the most effective way to get out of debt is to avoid the wrong ways of doing it. Here are some things to never do:
1. Payday loans.
Some people use payday loans as a way to pay bills or other obligations that would otherwise be paid late. They see it as a way to borrow from themselves rather than from someone else.
The problem is the interest charged by payday loan companies exceeds what any rational person would consider acceptable. This is never a legitimate way to get out of debt.
2. Borrowing from retirement savings.
While this may seem like a good idea to many people looking to get out of debt, the impact is seldom positive.
First off, there are tax penalties that apply when you take out a loan against your retirement savings. Second, the earnings power you lose by removing capital simply adds to the penalty.
Third, fewer than 40 percent of the loans ever get repaid in full, causing future losses in the form of missed opportunities to further penalize you.
3. Balance transfers.
Low interest or limited-time zero interest cards are touted by their issuers as a way to combine debt and pay it off quicker. The problem is it seldom works this way.
Most of us who get into debt trouble do so because our spending exceeds our income. If we have a new card to use, we will typically use it to run up more debt.
“There are plenty of ways to get out of
debt that don’t cause further trouble.”
4. Using a home equity loan or refinancing.
As with a new low-interest card, this can seem like a good solution, but it’s temporary.
A home equity loan buys us some breathing room, but is not a long-term solution. Refinancing adds to our expenses and can actually increase our debt load.
It is never a good idea to use debt to pay off other debt.
5. Debt settlement services.
Many debt settlement companies promote themselves as a solution to your debt burden. The problem here is they actually add to your debt in the form of fees you pay them.
In addition, they will often negotiate with credit issuers for lower payoffs that can have a negative impact on your credit score for years to come.
6. Borrowing from friends and family.
Even if a loan offered by a friend or family member comes with no interest charge, the cost is still too high.
The burden we feel by our inability to pay a credit card company or other faceless corporation is nothing compared with what we would feel by not paying back someone we love.
Instead, turn to friends and family for support, advice and empathy with the predicament.
There are plenty of ways to get out of debt that don’t cause further expense and trouble. Remember it took a long time to accumulate the debt, so plan for a period of belt tightening before you get through it.
But if you follow good advice and a good plan, you will see the light at the end of the debt tunnel. Good luck!
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