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What to Avoid When Trying to Get Out Of Debt

1. Not Having a Reasonable debt settlement Strategy

Begin by determining how much debt you have. Add up all your debt from student loans. Credit cards. personal loans. IRS and government debt. If you’ve been dealing in debt for a while this could add up to a large amount that can leave you feeling overwhelmed.

This may be a mistake

If you don’t have a plan for debt repayment, your instinct may be to cut back, save more, and make extra money until your debt is paid off. But if you make only the minimum payments over this period, you’ll continue to accrue more interest.

Pay down your debts every month. You can tackle high-interest debt first. Or you can focus on the lowest bill. Know what your plan is, and how you can accomplish it.

Is it ever sensible to pay down all your debts in one go?

Many times, it is impossible to pay off all your debts at once. If this is your goal, you will be doomed. You can use any cash you receive, such as a bonus or tax refund, to eliminate most or all of your debt.

Your credit score will rise if you can pay off your debt quickly.

2. Taking out payday loans

Payday loans are a great option for those who have outstanding car or home payments. You borrow money from the lender to pay for your car or house payment. Then, you send the lender a check and pay a finance fee.

However, the check can’t be cashed at once. Instead, the check is paid in full when you receive your next paycheck.

This may be a mistake

As payday approaches you may find yourself in more financial trouble. There are many other bills that you have to pay, plus a high-interest debt. The temptation is strong to take out a second loan to pay the first. You might also consider rolling over to a higher-interest payment plan, which can reach 400% per annum, if the first loan isn’t paid off.

The loan company may have obtained your permission to debit your bank account to cover the loan. Because your cash reserves are exhausted, the lender could charge you fees to make sure that you don’t default on any other financial obligations.

Do Payday loans make sense?

CFA reports that about 20% of payday loan borrowers default. The worst part is that more than half the online payday installment loan programs default. These numbers indicate that your odds of success are not in favor.

A personal loan could consolidate your debts and be a smarter solution.

3. Using Home Equity

When you find yourself cash poor or equity wealthy, it can be tempting use the home’s value to repay debts and other financial obligations. This debt is wrapped in a loan or line-of credit, which will allow you to pay less interest than if you had a credit card. This saves you money every month.

These are just a few of the ways that you can make use of your home equity to pay down debt

  • Refinance mortgage
  • Home equity loan of credit (HELOC).
  • Home equity loan
  • Reverse mortgage

This may be a mistake

You can save money every month by paying down your credit cards using equity. This will give you more money to spend on your credit. It seems great at first. You’ll end up in the same situation as before, with deeper water. This time, you won’t have the equity necessary to bail you out.

Credit card debt is not secured. Failure to pay the debt will leave the lender with very few options. The debt can now be paid off using your home equity. Failure to pay could put your home at risk.

Does Home Equity ever make sense?

Reinvest your home equity loan to make major home improvements and increase the property’s overall resale worth.

4. You are heading to the Pawnshop

To get cash now, you can sell jewelry, electronics, or any other valuable items to the pawnshop. There is no credit check, and the pawnshop keeps your items as collateral until the loan is repaid. Your property is all that you could lose if you default.

This may be a mistake

Your expectations about the amount of money you will get for your items may disappoint you. As the pawnshop will have to pay its costs for defaulting, you can expect to get only a small percentage of what your item actually is worth.

Lender interest rates are also high. Furthermore, pawnshops must report each transaction to law enforcement. So make sure you are sure the bikes you bought off Craigslist haven’t been stolen before you pawn.

If you don’t have the funds available on the due date, your valuables could be lost at a fraction of the cost. Selling your items online and at garage sales is better.

Does Pawning Your Possessions Make Any Sense?

Payday loans are your best bet if there is no other option. Only the property you are pawning is at risk, not your wage or your car.

5. Cash Advances for Credit Cards

If you have a shortfall in payments on your auto, mortgage, and car loans, you may be tempted by a cash loan to make up the difference. You might be tempted to take out a cash advance if this means you avoid paying late fees, bank fees returned-item fees, or bad credit reports.

This may be a mistake

There will likely be a cash advance fee. The interest rate you pay on the cash advance amount should be higher. Remember, interest begins accruing from the moment you take out a cash advance.

A cash advance is the most expensive type credit transaction. Credit card companies are in business to make money. Therefore, they apply your monthly payments towards lower-interest debts first. Any money applied over the minimum payments is then credited towards the highest annual percent rate debt, such as a Cash Advance. Even if you only make the monthly minimum payment, the high-interest cash advance rate will be continued until all lower-interest purchases are paid off.

Is it ever sensible to take a Cash Advance on Credit Cards?

It’s rarely a good idea to take on additional high-interest debt. Next month will be even more difficult as you have to pay the higher interest debt.

Instead of using your credit card to get a cash advance, look into smarter options that have lower interest rates. A personal loan can provide the funds you need at a lower interest rate. This could result in you saving hundreds to thousands of dollars.