Credit Card Repayment Strategies to Avoid
UPDATED: April 13, 2012
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Getting out of credit card debt is not as easy as getting into it. Most advisors tell you to stop using your credit cards and pay off what you can, starting with the cards that have the highest interest rate. Other strategies include transferring your balances to a card with lower interest rate and getting a debt consolidation loan.
However, these are only temporary measures to ease the symptom. They won’t solve the underlying problem unless you stop spending more than you can afford. Simply put, pay off the debt, then figure out exactly what you can spend and stay within that limit.
Avoid Repayment Schemes
Advisors may also warn you not to turn to any of the widely touted repayment schemes that look tempting on the surface, but can create more problems than they solve.
One such temptation is a home equity loan. These often come with points, fees and other hidden costs, even though they are easier to obtain than a home mortgage loan. It is not generally advisable to put your home in jeopardy—which is what you do if you don’t meet your payments—to pay off your credit card debt. This kind of loan, with its unexpected costs and real downside, won’t solve the problem of undisciplined spending. It merely makes it easier for you to lose your home.
Avoid Turning to Retirement Savings
Dipping into your retirement savings is also a bad idea, not only because you will face a 10 percent early withdrawal penalty but also because you will be taxed at a normal rate for any funds you withdraw. That means you are paying a huge penalty to pay off your credit card debt and also robbing yourself of funds you may need for your retirement.
Taking Out Cash Advances
Taking a cash advance on one credit card to pay off the debt on another is also a bad and potentially costly idea. Cash advances come with a fee, often about 3 percent of the amount advanced, and high interest rates that start immediately
Yet another bad idea is taking an advance, or loan, against your next paycheck. Finance companies make these loans easy and with good reason. Both fees and interest are high. This is no solution to your credit card debt, only one that perpetuates the problem and makes it worse, especially if you get into a cycle of borrowing against each next paycheck.