There’s a lot of conflicting advice out there telling people how to reduce or get rid of their debt. It’s hard to know what to believe and what to disregard when you’re trying to tackle what you owe—but keep in mind that there’s no one universally correct solution that applies across the board.
It’s very important to avoid taking actions that will actually make your debt worse, which will set you back even farther from your goal of becoming debt free. Some things that seem like helpers at first glance might actually hurt your cause!
Start by avoiding these six actions that can make your debt worse.
#1: Paying Only the Minimum Due
Each credit card statement you receive will stipulate a minimum amount you can pay to avoid late penalties and delinquency. It’s usually either a small percentage of your total balance, like 3 percent, or a small fixed fee, like $25. This is a tempting option, especially if your balance is higher than you can afford to pay off.
But there’s a cost to only paying the minimum. The Balance outlines the difference between paying off a $5,000 credit card balance at 14 percent APR using only the minimum (2 percent) vs. paying $125 per month. It’d take you 22 years and add $5,887 in interest if you paid only the minimum every month. Boosting your payments to $125 monthly means you’d pay off that same balance in less than six years, and you’d pay a much lower $1,775 in interest.
Even if you’re dutifully paying the minimum, your balance is still racking up interest month after month—something that keeps you in debt longer, though it may feel like you’re getting temporary relief.
#2: Falling for a Debt Relief Scam
It’s totally understandable that you’re eager to get rid of your debt. After hearing about debt settlement, you think this strategy could help you reach an agreement with creditors: They accept a lesser percentage of your total balance in exchange for timely payment. So, you decide the next step is to enroll in a debt settlement program—except in your hurry, you accidentally start working with a less-than-legitimate company. Suddenly you’re in the hole for even more money and your creditors are threatening legal action.
Debt settlement has helped hundreds of thousands of consumers get a handle on their serious debt. But it’s not for everyone. Success depends on working with a reputable program, one that has a track record of getting good results for clients. Reading through Freedom Debt Relief reviews will give you an idea of people’s real experiences working with an industry leader, for instance. Any company without plenty of honest reviews behind their name is untrustworthy in our internet era.
#3: Neglecting Your Emergency Fund
An emergency fund acts as a safety net, something you need whether or not you’re in debt at the moment. Neglecting your emergency fund now means you may be forced to take on more debt when an unexpected expense crops up, like a trip to the emergency room or a layoff.
#4: Continuing to Buy on Credit
The most counterproductive thing you can do is continue to buy on credit while you’re trying to figure out how to pay down your credit card debt. Keeping the cards open will help your credit score because your maximum credit limit will be higher and your history longer, but you should avoid using them.
Try instead switching to a cash-based budgeting system in which you set aside a reasonable portion of your income divided by spending category.
#5: Taking Out Short-Term Loans
You’re in a pinch. A one-time loan will help you get caught up, right? Wrong. Short-term loans carry extremely high interest rates. Payday loans can carry an APR upwards of 400 percent. At best these dangerous loans act as a Band-Aid; at worst they can badly exacerbate your existing debt.
#6: Transferring Your Credit Card Balance
You’re sick of paying 18 percent interest on your credit card debt. Then you get an offer in the mail for a no- or low-interest credit card. So, you transfer your balance over, thinking it’ll save you tons in the long run.
Balance transfers can save consumers money—but only if you know what you’re doing. Factor in the balance transfer fee; and read the fine print. Is the zero or low interest rate part of an introductory offer? If so, you’ll only reap the APR benefits for a set period of time before interest jumps back up.
Have debt? Make sure you avoid these six actions that can actually make it worse.
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