Tackling Your Debt? Avoid these Mistakes
It is never too soon to start chipping away at your debt. The more debt you can pay off, the better your credit will be. Also, the amount you spend on debt service each month should fall, especially if you can contribute extra money each month to the debt principal.
However, there are certain errors you should not make when tackling your debt. These mistakes can actually lead to you being worse off than you were before.
Don’t Use Home Equity to Pay Off Credit Cards
Credit cards are a form of unsecured debt. This means no asset has been pledged to creditors as collateral. If you need to file for bankruptcy, your unsecured debts get wiped out, leaving you free and clear.
Unfortunately, home equity loans and lines of credit are secured loans. Your home acts as collateral. If you default on these loans, your creditor can move your home into foreclosure. And bankruptcy won’t eliminate a secured loan.
As you can see, you should do anything possible but use a secured loan to pay an unsecured debt. Instead, contact your credit card companies and ask about repayment options. They might let you skip a month, reduce your interest rate, or convert the debt to a fixed installment loan. Any of these options is preferable to using home equity.
Don’t Raid Your Retirement Account
You have probably worked hard to save for retirement. Leave the money alone instead of dipping in to pay off debts. If you are under 59 ½, you’ll pay a penalty to withdraw funds from most retirement accounts. Very few people ever pay back everything they took out of the retirement account, which means they have fewer assets at retirement.
Don’t Take Out More Debt
Once you start reducing your debt load, you might be tempted to start spending again. Your creditors might even start offering more credit now that your credit profile has improved. Avoid the temptation. Your goal is to get debt free, not become even more indebted.
Avoid Skimping on an Emergency Fund
People need an emergency fund for those unforeseen expenses, such as emergency dental surgery or to fix a broken-down car. An emergency fund should also be able to float you for a few months if you are suddenly laid off from work.
If money is tight, you might not see any way to save up for an emergency fund, but you should start small anyway. Even $10 a week is better than nothing. Put it in a savings account and don’t touch it. At $10 a week, you’ll have $520 after one year. If you can save $20, you’ll have over $1,000. Ideally, you should save up to 6 months of expenses as a goal.
Avoid Debt Relief Scams
There are many scammers out there promising to make debt magically disappear. These companies do far less than promised and usually charge hefty fees.
If you find yourself going under financially, reach out to to the Plantation bankruptcy attorneys at Nowack & Olson. Bankruptcy is always an option, especially for credit card and medical debt. We offer a free consultation to those who call 888-813-4737.