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. Getting a Home Equity Loan: It can be tempting to think about withdrawing cash from your home equity to pay bills. You apply for a home equity line of credit (HELOC) and transfer all of your debts into this single, larger loan. The upside is one monthly bill that could be at a lower interest rate. However, your home is now the collateral securing the debt. In other words, if you get into a situation where you cannot make the full payment on the HELOC, then your residence can be at risk.

    What to do instead: Apply for a personal loan. This can also provide the benefit of a single payment at a lower interest rate. If you’re concerned you won’t qualify for a low rate, explore using a newer independent lender rather than a traditional bank or credit union. Newer lenders use different criteria to evaluate how likely a person is to repay a loan. Alternatively, consider a balance transfer to a credit card with a low-interest promotional offer. Only do this if you can fully pay off the card within the low-interest time period, or else you could be back where you started.

  2. 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.

  3. 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.


  4. 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.


  5. 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.