The Best and Worst Ways to Deal with Credit Card Debt |
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by: Janna Weiss
Credit card debt can be managed and even eliminated completely if you go about it the right way. Unfortunately, some of the most common debt ‘solutions’ are worse than the debt itself! Here’s some friendly advice to help you decide which debt recovery methods to try, and which ones to avoid.
Payday Loans
When people are desperate for money, payday loans might sound like a good idea. But these loans are set up in a way that makes it hard to break the cycle once you start borrowing. Many people have found themselves borrowing against their paycheck, only to extend the loan – at a truly outrageous and exorbitant interest rate – in order to pay their other bills for the month. Use payday loans only if you absolutely have no other choice, and only if you can afford to repay them in full as soon as possible.
Retirement Savings
Raiding your 401K to pay off your credit card debt isn’t such a good idea, either. The amount you withdraw will be subject to tax and penalties, leaving you with far less money than you anticipated. You will have to repay the balance within five years, and will be responsible for the full amount if you lose your job. Still, borrowing from your 401K is preferable to payday loans. At least, with the 401K, you’re paying yourself back.
Cash Advances
Some people take out hefty cash advances on one credit card to pay off the balance on another. This is counter-productive, especially since cash advances have much higher interest rates than regular purchases. You might end up owing more money if you use cash advances to pay off card balances.
How to Do It Right
So what are some good ways to pay off your credit card debt? Experts recommend shifting your budget around so that you can make more than your minimum monthly payment each month. This will help you make headway on your debt and also build a strong repayment history on your credit report.
If you can’t do that, and you know you can pay off your debt within 6 months to a year, transfer the balance to a 0% interest card. Just be sure not to carry the balance beyond the 0% interest introductory period, or you’ll be subject to interest once more – possibly at a higher rate than before.
Finally, if you’re a homeowner, you can take out a low-interest home equity loan to pay off your credit cards. Just be aware of the risks before you take this step. You cannot lose your home over unsecured credit card debt; you can lose your home if you default on your home equity loan repayments.
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