Debt payoff is a great goal—whether it’s student loans or credit cards, eliminating what you owe can help you feel free. Any effort to pay off debt is worth the work, yet some types of repayment might make your debt problem worse. As you take control of your debt, learn the repayment tactics to avoid and what to do instead.
1. Taking a Payday Loan
It sounds like a good way to tide you over until the next paycheck, yet most borrowers will not repay the loan in full when they get paid or might even make their debt worse by borrowing again. Payday loans can have an annual interest rate of up to 400%. To put this into financial perspective, this means that over 3 months, the interest on a $300 payday loan debt could grow to be as much as $270 compared to just $12 if it grew at 16% credit card interest
What to do instead: Set aside part of your income—10% or more, if you can—into an emergency fund. Even $100, $500, or $1,000 can make a big difference in handling an unexpected medical bill or car repair.
2. Making an Early Withdrawal from Retirement Funds
Retirement savings, such as a 401(k), can be crucial since Social Security is expected to cover only a portion of most people’s retirement expenses. In addition, if you pull out funds prior to withdrawal age, you can incur both taxes and penalties, so you will not get the full value of your savings.
What to do instead: If necessary, try other options for repaying debt—including debt negotiation, debt consolidation, or credit counseling
3. Skipping Tax Payments
Not paying taxes so you can use the funds to repay debt is like jumping from the frying pan into the fire! You can face harsh federal or state consequences, such as interest and penalties on the debt, garnished wages, or possibly time in jail
What to do instead: Talk to an accountant, tax attorney, or tax debt resolution firm as these professionals might be able to negotiate a lower payment for your taxes and/or your other debts.
4. Extending Student Loan Timeframes
Stretching student loan repayment periods farther than you absolutely need to can cause you to be paying for college until you’re close to retirement!
What to do instead: If you cannot pay your student loan, contact the lender immediately to learn about possibilities, yet be cautious of deferment programs as these can prolong the debt.
Also think if there are ways for you to find money for these loan payments: Can you take an extra job? Get a roommate? Cut down on eating out of the house? Your future self will thank you for today’s sacrifices.
Paying off debt the right way can help ensure you don’t make your financial situation worse. Getting out of debt is tough and you might still need help even though you have tried some of the above steps. If so, then consider enrolling in a debt relief program like the one offered by Freedom Debt Relief. Designed to get you on track, our program might help reduce the overall amount you owe to your creditors and could help you pay off your debt in a smarter, faster way.
Regardless of the program you choose, make certain to select a company that is a member of the American Fair Credit Council (AFCC) as this ensures high standards for consumer advocacy and your protection