5 Bad Ways to Pay Off Debt (and what to do instead)
ByLyle Daly
UpdatedJun 23, 2025
- It's not good to pay debt with another loan unless it offers a lower interest rate, payment, or both.
- Withdrawing early from retirement accounts is a very expensive debt repayment scheme.
- Paying debts by NOT paying your taxes can get you into serious trouble with the IRS.
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Paying off debt is a great goal, whether you have credit card balances, student loans, or another type of debt. Once you’re finished, you don’t need to pay expensive interest charges anymore or find money in your budget for debt payments.
Any effort to reduce your debt is commendable. That includes doing it yourself or with a debt relief program if you need a helping hand. But there are bad ways to pay off debt that could actually make your debt situation worse. Here are a few tactics to avoid and what to do instead.
1. Taking a Payday Loan
At first, a payday loan might sound like a convenient way to tide you over until your next paycheck. The problem is that payday loans are predatory lending with sky-high interest rates. Lenders typically charge $10 to $30 for every $100 you borrow, according to the Federal Trade Commission (FTC), and the usual term is just two weeks. You could end up paying what amounts to an annual interest rate of 400% or more. Payday loan rates have been known to surpass 1,000%.
Most borrowers also aren’t able to pay off their loans in full when they get paid. Then, the only solution is to roll over the payday loan, where you pay off the interest and borrow again at the same excessive interest rate.
What to do instead
Consider a professional debt relief service if you’re unable to make payments on your debt. A payday loan, in all likelihood, would only make the situation worse.
2. Making an Early Withdrawal From Retirement Funds
Retirement savings, such as a 401(k) plan, are practically a must-have. Social Security benefits replace about 40% of pre-retirement income, on average. You’ll be more comfortable financially if you can supplement that with your own savings.
You may be tempted to pull from your retirement savings to pay off debt. But there are consequences to withdrawing money before you reach retirement age. With retirement accounts, you generally pay hefty taxes and an early withdrawal penalty if you take out money before age 59 1/2. You’d be forfeiting a large amount of your savings, which is why early withdrawals from a retirement account are near the top of the list of bad ways to pay off debt.
What to do instead
Try other options for repaying debt, including debt negotiation, debt consolidation, or credit counseling, so you don’t need to touch your retirement accounts.
3. Skipping Tax Payments
It’s never a good idea to run afoul of the IRS or state tax authorities. When you don’t pay your taxes, you could incur interest charges and penalties on the debt, have your wages garnished, or even face jail time in a worst-case scenario.
What to do instead
Talk to an accountant, tax attorney, or tax debt resolution firm. These professionals might be able to negotiate a lower payment or set up a payment plan for your taxes or your other debts. The IRS ultimately just wants you to pay your taxes and could work with you to find a suitable arrangement.
4. Extending Student Loan Repayment Timeframes
Student loan debt can be costly, because even if the interest rate is low, many borrowers have a large amount of debt. If you stretch student loan repayment too far, your debt will rack up more interest charges. You could still be making payments when you’re close to or even in retirement. You also can’t easily discharge student loan debt in bankruptcy like you could with credit card debt, personal loan debt, and other types of debt.
What to do instead
If you can't pay your student loan, contact the lender immediately to learn about your options. But be cautious of deferment programs that prolong the debt substantially.
5. Rolling Over an Auto Loan
If you want to buy a new or used car, but you haven’t paid off your current vehicle, auto dealers normally let you roll over an existing auto loan. You trade in your current car, and the dealer adds the balance from the old loan to the new one.
Because you’re borrowing even more money, while you still owe money on your last car, you could go deep into debt this way. You’ll also likely be upside down on your new car, meaning you owe more money than it’s worth.
What to do instead
Pay off your car loan before you consider getting a new vehicle. Even better, drive your current car for as long as possible and resist the temptation to upgrade. When you don’t have a car payment, you’ll have more money to use elsewhere in your budget.
Whatever type of debt you’re trying to pay off, think about ways to find money for those payments. Can you take on an extra job? Get a roommate? Cut down on eating out? Your future self will thank you for making sacrifices today, rather than choosing any number of bad ways to pay off debt that could hinder your future.
Consider All Your Options to Attack Your Debt
When you pay off debt the right way, you ensure that your financial situation gets better, not worse. You can certainly do this on your own, but debt can also be difficult to manage, and you may feel like you still need help even if you’ve tried some of the above steps.
If you’re struggling with debt or just worried about falling behind on payments, Freedom Debt Relief is here to help you understand your options, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify right now.
Debt relief by the numbers
We looked at a sample of data from Freedom Debt Relief of people seeking credit card debt relief during May 2025. This data reveals the diversity of individuals seeking help and provides insights into some of their key characteristics.
Credit card tradelines and debt relief
Ever wondered how many credit card accounts people have before seeking debt relief?
In May 2025, people seeking debt relief had some interesting trends in their credit card tradelines:
The average number of open tradelines was 14.
The average number of total tradelines was 24.
The average number of credit card tradelines was 7.
The average balance of credit card tradelines was $15,142.
Having many credit card accounts can complicate financial management. Especially when balances are high. If you’re feeling overwhelmed by the number of credit cards and the debt on them, know that you’re not alone. Seeking help can simplify your finances and put you on the path to recovery.
Credit card debt - average debt by selected states.
According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average credit card debt for those with a balance was $6,021. The percentage of families with credit card debt was 45%. (Note: It used 2022 data).
Unsurprisingly, the level of credit card debt among those seeking debt relief was much higher. According to May 2025 data, 88% of the debt relief seekers had a credit card balance. The average credit card balance was $16,327.
Here's a quick look at the top five states based on average credit card balance.
State | Average credit card balance | Average # of open credit card tradelines | Average credit limit | Average Credit Utilization |
---|---|---|---|---|
District of Columbia | $15,789 | 7 | $24,102 | 86% |
Arkansas | $14,216 | 9 | $28,791 | 78% |
Oklahoma | $14,158 | 9 | $27,261 | 78% |
Alaska | $19,315 | 8 | $25,731 | 77% |
Ohio | $15,397 | 8 | $26,156 | 77% |
The statistics are based on all debt relief seekers with a credit card balance over $0.
Are you starting to navigate your finances? Or planning for your retirement? These insights can help you make informed choices. They can help you work toward financial stability and security.
Support for a Brighter Future
No matter your age, FICO score, or debt level, seeking debt relief can provide the support you need. Take control of your financial future by taking the first step today.
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Author Information

Written by
Lyle Daly
Lyle is a financial writer for Freedom Debt Relief. He also covers investing research and analysis for The Motley Fool and has contributed to Evergreen Wealth and Monarch Money.
How do you get serious about paying off debt?
Make a list of all your debts, including the type of debt, amount, and interest rate. Figure how much you can afford to pay toward your debt each month, and then decide on a repayment plan. Popular options include the debt avalanche, where you focus on the debt with the highest interest rate first, and the debt snowball, where you focus on the debt with the lowest balance. If you’re unsure how to pay off debt, talk to a Certified Debt Consultant with Freedom Debt Relief.
What should you not do when paying off debt?
Avoid extending your debt for a lower monthly payment unless absolutely necessary. When you stretch out the repayment period on a debt, you also prolong the period when you’re charged interest. You end up paying more interest, and your debt is more expensive overall.
Which types of debt can’t be erased?
Debt that can’t be erased in bankruptcy includes alimony, child support, some tax debts, and debts for death or personal injury caused by the debtor driving under the influence of drugs or alcohol.
Credit Card Debt
