You might be following a debt repayment plan for some time only to discover that your debts are not reducing. This is because the plan you’re following is just providing instant relief without alleviating the real problem. If you’re not tracking your progress, it may take you really long to find out that you’re taking the wrong route in paying off your debt. Here are 5 wrong ways to pay off your debt.
01 Borrowing From Your 401K (Retirement Fund)
You shouldn’t borrow from your 401K period, much less to pay off your debt. When you do so, it can lead to any of the following;
First, your employer may not let you contribute to it anymore until you’ve repaid the loan. Second, your take-home pay is less (because you have to pay back the loan) until the money’s paid back. Third, if you leave your job, you’ll have to pay the entire loan immediately or you’ll end up with early withdrawal fees and income taxes.
When it comes to paying off your debt, borrowing from your retirement fund is a terrible idea.
02 Refinance Your Mortgage | Wrong Ways To Pay Off Your Debt
Refinancing your debt into your mortgage is one of the wrong ways to pay off your debt. Especially, if your debt was unsecured, to begin with. Tying bad debt to your home’s equity isn’t smart. You could lose your home and get a bad credit rating when you can’t make payments.
03 Debt Settlement | Wrong Ways To Pay Off Your Debt
Debt settlement companies can make the situation worse though they seem to offer instant relief in troubled situations. For the scheme to work, you have to stop paying your creditors. When the payments stop, the phone calls start and so do the late fees and negative credit report entries.
In the end, your creditors may not agree to a settlement proposed by your company. So, you might end up still owing the money. (Note: settling already delinquent debts on your own is a different, sometimes better strategy.) Settling your debts is a lengthy process. Even when it’s successful, you’ll spend the next few years rebuilding the credit score you lost.
04 Consolidate With a High-Interest Loan
Debt consolidation may be a solution if you can get a loan at the right terms. If the only loan you can get has a higher interest rate than the average of your credit card debt, it’s best left alone.
Your monthly payments may look lower with debt settlement, but that’s only because the loan is spread over a long repayment period. If you add up the interest you’d pay over the life of the loan, you’ll see that you’re spending more money than if you hadn’t consolidated with that loan.
05 Transfer Your Balances to Other Credit Cards
Transferring balances to credit cards with those low introductory rates only makes sense when you are financially able to pay off the balance before the introductory rate expires and you will not use the card to make purchases or take out cash advances. If you can’t transfer the balance under those conditions, it won’t work for you. And, don’t bother about shuffling your balance to a new credit card with a new teaser rate, the balance transfer fees negate the interest savings.
it may take you really long to find out that you’re taking the wrong route in paying off your debt. Here are 5 wrong ways to pay off your debt.
