At a Glance
Paying off debt is a liberating experience if you do it the right way. Consumers generally begin the process with an online search. Some of the debt payoff strategies they find are solid, like the debt snowball or debt avalanche. Others, despite sounding reasonable, should be avoided at all costs. We’ve compiled a list of these to help you make the right choice.
5 Dangerous Debt Payoff Strategies
Focusing strictly on a credit card payoff strategy, for example, is risky because it may take your focus off other debts that could become unmanageable if all your extra money is going to credit card debt. Some other strategies negatively impact your credit score, and still others extend the amount of time you’ll spend paying off debt rather than cutting it short. This is why it’s important to research the various debt payoff strategies before implementing any plan. The following information should help:
1. Debt settlement lower your credit score
Avoid debt settlement agencies that ask you to miss payments on your debt accounts. Every missed payment takes points off your credit score and your credit report will reflect that you settled and did not pay the full balance owed. Lenders will look at that when you apply for additional credit in the future. Debt settlement is not the best way to pay debt fast.
2. Debt Consolidation only solves half the problem
Taking out a debt consolidation loan to pay high-interest credit card debt is a financially responsible move, but it only solves half the problem. Excessive spending is what got you into trouble in the first place. If you don’t address that issue, you’ll quickly end up with credit card debt again, along with the monthly loan payments you’ll need to pay for the consolidation.
3. Emergency funds are for emergencies
The presence of extra cash in an emergency account often tempts consumers to use those funds to pay off debt. They justify it with the rationalization of replacing the money quickly once the debts are resolved. What happens if you have an emergency before that happens? Emergency funds are for emergencies. Leave that cash where it belongs.
4. Using a HELOC puts your home at risk
Defaulting or making late payments on credit cards will lower your credit score and make it difficult to qualify for new credit in the future. Defaulting on a HELOC could leave you homeless. It’s simply too risky, no matter what the interest rate is. Learn to compartmentalize your debt; anything related to your home should be kept separate.
5. 401(k) loans reduce your retirement prospects
Similar to what we just told you about HELOCs, 401(k) plans have a singular purpose. They are there for your retirement, not to borrow from for debt payments. Taking out a 401(k) loan may seem reasonable because you’re “borrowing” your own money. However, what you’re really doing is stealing from your older self and potentially putting yourself at risk of not being debt-free during retirement. You’ll need those funds in your golden years. Leave them alone.
The Bottom Line: Find Another Way to Pay off Your Debt
Sometimes you just need to make your monthly payments on time and stop using your credit cards. It’s the long road, but it’s the safest way to pay off debt and shortcuts come with negative consequences. Adding a few extra dollars to one account each month will help quicken the pace. That’s what the debt snowball and debt avalanche methods are all about. Either of these methods is a better and safer option than any of the dangerous debt payoff strategies on this list.