Credit card debt can cripple ones finances, leaving a person stuck in the credit card trap. Credit card balances continue to attract interest each month, which can push debt higher. Making the decision to eliminate the debt card is the first step to putting ones finances back on track, offering the ultimate prospect of living within ones means. However, there are some risky ways to pay off credit debt which should be avoided as they can make the overall financial situation worse and ultimately threaten financial security.
The one advantage credit card debt has over many other debt obligations is that it remains unsecured. The riskiest way to pay down debt is to convert unsecured debt into secured debt. Taking a loan may appear tempting as it could reduce the overall amount of monthly repayments. A far better option is to negotiate a lower interest rate on outstanding credit card debt with the current lender.
Many people fall into the trap of taking on a debt consolidation loan or a home equity loan to clear down credit card debt. Offering a home as security for a loan puts ones home at risk and increases the term of the mortgage, making it more costly in the long run. Home equity loans reduce the current equity in the home, a danger that becomes all too apparent if house prices fall leaving the home owner trapped with negative equity.
Additionally a very low percentage of people who take loans to clear down debt actually manage to do so: in fact the most common result of obtaining a loan to pay down debt is an increase in debt as the borrower continues to use credit in addition to the necessity of servicing the extra monthly loan payments.
Another risky way to pay off credit card debt is to pay a debt consolidation company. Often such companies are not legitimate and can result in increased debt. Additional fees and charges will be added to the debt. Often a debt settlement company will negotiate a partial payment of the debt in full settlement. However the individual can negotiate with the credit card company themselves without resorting to paying a company. Debt settlement leaves the written off debt liable to tax which the IRS will pursue, in addition to having a negative impact on ones credit score.
It is never wise to borrow to pay off unsecured debt or to deplete any emergency fund or pension fund. A far more viable option to reduce credit card debt is to transfer the debt to a zero or low percent balance transfer card in order to reduce the total amount of interest paid, providing one is determined to cease all spending on credit. This has the advantage of offering the opportunity of paying the debt back faster whilst retaining the debt as unsecured.
When paying back credit card debt it pays to focus on the end goal of eliminating the debt as quickly and effectively as possible. Avoiding risky methods of debt repayment involving borrowing and debt consolidation companies offers the surest way of ending up free from credit card debt without putting ones home or other collateral at risk.