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Five Dumb Ideas for Getting Out of Debt

There are great ways to get out of debt. And then there are these five ideas, below.

This is an article about “What NOT to do.” Avoid the following five tactics. You might be tempted to view one of these tactics as a shortcut to getting out of debt, but believe me – you don’t want to mess with these ideas.

Instead, pay down your debt the old-fashioned way: earn extra money on the side, cut your expenses, and throw every spare penny at your debt.

Without further ado – here’s what NOT to do.

#1. DON’T Pay Off Debt With Your Retirement Savings

Your retirement plan should never act as a personal savings account for paying back debt. For starters, the minute you take out money from your retirement savings, you stop losing the compounding interest and gains that come from keeping that money invested. Additionally, you also risk short-changing yourself during your golden years.

#2. DON’T Refinance Your Mortgage and Use the Cash to Pay off Your Credit Cards

Refinancing your mortgage in order to pay off consumer debt (like credit-card debt) usually ends up compounding the problem.

If you cannot pay off your consumer debt in time, your credit rating suffers. However, if you refinance your mortgage and are still unable to pay off your debt, not only does your credit rating suffer, you could also be in danger of losing your home.

Additionally, you might just wind up back in credit card debt again … only this time, you’ll ALSO have a second mortgage on your home.

#3. DON’T Stop Making Debt Payments

Some people try to negotiate with their creditors by first scaring the lender into thinking that they’re going to default – and then working out an agreement.

However, for this scheme to work, you have to stop making payments. This dings your credit rating, and only makes your debt worse as the bills keep piling up. Furthermore, it exposes you to the risk of higher interest rates – known as “penalty rates” – that result from missing payments.

And if your creditors don’t agree to the proposed settlement, you are then left to pay back all the debt – only now you’ll owe even more money than before.

#4. DON’T Consolidate with a High Interest Loan

Consolidating debt often makes it easier to pay back what you owe, but only under the right circumstances. If you can consolidate your debt with an interest rate that either matches your current credit card or is less than your credit card, then it is a good choice. However, if you consolidate your debt with an interest rate that’s higher than your current credit card rate, you end up owing even more money. While your monthly payments may look lower, over the lifetime of the loan you’ll see that you’ll end up paying more than you would have if you didn’t consolidate.

#5. DON’T Transfer Balances to Different Credit Cards (Unless You Have a Solid Plan)

Let’s say your current interest rate is 10 percent, but you come across a credit card that offers a 5 percent interest rate as an introductory offer. The 5 percent rate lasts for six months, and then shoots up to 14 percent.

If you cannot pay off your debt within those first six months, don’t transfer your balance from one card to another. You won’t end up saving any money, and likely end up owing more than you started out with.

(If you can genuinely pay back your loan during that “teaser” period, then this technique is worth considering. But be honest with yourself.)

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