7 Hazardous Ways to Pay Off Credit Card Debt
The average American family has nearly $16,000 in credit card debt. When you are in credit card debt, it can feel suffocating, as if you will never be able to escape the debt trap. Credit cards can carry very high interest rates, and your interest rate can rise significantly if you are ever late with making a payment or if you exceed the limit on any of your credit cards. Making the minimum payment on credit cards means you will pay significantly more than the value of the items you purchased on your card over the course of time. Once you have become trapped in this debt cycle and more of your money is going to interest, it will become even harder to ever get yourself out of debt and stop getting further in the hole.
If you have made it a priority to pay off your credit cards, you may wish to look for solutions that will allow you to pay off the debt in one lump sum or that will allow you to repay more than the minimum balance that you owe. While there are good ways to repay all of your credit card debt at once, like getting a personal loan from a lending institution, there are also some very bad ways to pay off credit card debt. Here are seven hazardous ways to pay off debt that you want to be sure to avoid.
1. Borrowing from Relatives
Borrowing money from family is a quick way to ruin your relationships. You may feel indebted and embarrassed, and your family members may feel resentful. You do not want to mix money and family if you can help it.
2. Home Equity Loan
A home equity loan means that you borrow money from the value of your house, stripping your home of equity. This is almost always a terrible idea, although it can seem attractive since home equity loans typically have much lower interest rates than credit cards do. If you take money out of your home, you could end up underwater on the house. This means if you ever need to sell, you may be unable to do so and could end up with the bank foreclosing on the house. When you take on a home equity loan, you also covert unsecured credit card debt into secured debt. If you file for bankruptcy, you cannot discharge the unsecured mortgage debt as you could the secured credit card debt. Do not bet your house on your ability to repay the balance that is due.
3. Home Equity Line of Credit:
A home equity line of credit is similar to a home equity loan, except you have a line of credit and can borrow as much as you need to up to the credit limit, rather than borrowing a lump sum. Since this can encourage you to get even deeper into debt, this is actually a worse way to pay off credit card debt than a home equity loan as it carries all the same risks and more.
4. Car Title Loan
Car title loans typically come from pawnshops and payday lenders. You are given cash and you pledge your car as collateral. If you miss a single payment, your car could be taken from you. These loans are expensive and these loans put your vehicle at risk, so they are a very bad idea.
5. Raiding your 401(K) or Retirement Accounts:
If you take money out of your 401K or other retirement accounts, you risk your future financial stability. You also have to pay a heavy tax penalty for taking money out of these accounts early in order to repay credit card debt. While you can take a 401K loan without triggering the tax penalties, you would need to repay this loan quickly if you lost your job or switched jobs (which is usually exactly the time you do not have money to repay it.). Your retirement accounts are protected in bankruptcy and should not be touched to repay credit card debt.
6. Payday Loans:
Payday loans come from lenders that charge shockingly high interest rates. The average APR for a payday loan is around 339 percent! These loans are much more expensive than credit cards are. You do not want to get into a cycle where you owe money to a payday lender, even if it means that you are going to be late in paying your credit card bills.
7. Balance Transfers
Balance transfers mean you borrow money from one credit card to repay another. There is a fee associated with balance transfers, which will increase the debt balance that you owe. You are also going to have a teaser interest rate only for a limited period of time, and that rate will end up increasing if you miss a payment. You do not want to simply move debt from one credit card to the other and end up right back where you started with high interest rates.
Avoid these methods of paying off credit card debt, as they are only likely to get you into worse financial shape. Instead, consider a signature loan to repay your credit card balance.