It only takes a few missteps like missing a payment or exceeding your credit limit to turn a healthy credit situation into damaged one. Before you know it, the bills are piling up and you’re deep into credit card debt.
If you find yourself in this situation, there’s a right way to reduce credit card debt and a wrong way. Below are some common mistakes people make when trying to reduce large amounts of credit card debt. Although some of these methods may seem like good options, they’re likely to get you into more trouble:
4 MAJOR NO-NO’S
- DON’T get a home equity loan to pay everything off: It may seem like the simple solution – but in reality, you’re gambling with your home to pay off your credit cards. And it’s not cheap. Why don’t you create a budget and start managing your money correctly? The truth is, most people who shuffle their debt around without changing old habits not only end up with a second mortgage, but even more debt problems.
- NEVER use your 401(K) or retirement savings to pay off debt: The tax advantages that apply to your retirement accounts will not only be lost, but you’ll pay twice! You’ll pay a 10% penalty for early withdrawal and taxes on the full withdrawal amount – meaning you’ll only get about 65% of the money you take out of your retirement account. DON’T DO IT!
- Don’t ‘Rob Peter to Pay Paul’ with a cash advance : Applying for a new credit card and taking out a cash advance to payoff your old credit card is BAD IDEA. Not only is there a 3% fee to worry about, but the exceptionally high interest rate will go into effect the minute you initiate the process. Cash advances are a bad idea for any reason!
- Just say NO to payday loans / advances. APR’s on payday loans can be as high as 35% with a wide range of fees. Why would you take out a high rate loan to payoff your debt? Even if you’re paying just as much with your credit cards – you’re accomplishing nothing.
If you’re trying to reduce your debt, the first step is to change your attitude and have a realistic game plan. It’s not going to happen overnight! It takes time and persistence to get your credit back on track.
Cutting up your credit cards is probably a good idea if you can’t control your impulses. Try to live on cash and checks – and, more importantly, live within your means. Once you start chipping away some of your debt, you might consider a good 0% APR credit card so you can transfer your remaining balances and pay zero interest. This could help you reduce your debt even faster if you can avoid making too many new purchases.