Credit Card Debt Strategies that Should Be Avoided
Many individuals faced with credit card debt are looking for fast and effective methods for getting debt under control. While the urgent need to get out of debt, to reduce credit card debt, and to ease the psychological and financial burden associated with debt is understandable, rushing into any kind of credit card debt strategy available out there is not recommended. In fact, there are certain debt repair strategies that you will want to avoid all together when dealing with credit card debts.
When people realize that they are faced with out of control credit card debt, they sometimes consider using their investment and savings in a 401K plan. Often times it is possible to borrow against the money in your 401K account and this option, at least on the surface, seems like a reasonable solution to debt problems. However, consider this: if you borrow from your 401K retirement plan, you are hindering your plan’s ability to grow over time and supply you with the all important retirement funds you will need in your later years. If you borrow from your 401K plan, you lose out on the interest that the money can generate. What’s more, if in the future you change your job to another company or you are forced to leave your job, the 401K loan has to be repaid within two to three months from the time you leave the company, otherwise you have to pay tax penalties on the borrowed funds.
Another option that some people think of using to pay off credit card debts is to get a home equity loan. If, for example, you have accumulated a lot of credit card bills, you will want to give serious thought about how you are going to pay them off. Your first inclination might be to take out a lower interest home equity loan on your house to pay off your higher interest credit card debts. This might sound like a good idea since you will be paying less and lower interests, but it is really not advised.
While it may seem beneficial to use your home equity for a loan that can get rid of all of your existing credit card bills, you really will be going from the pot to the fire. Credit card debt is unsecured debt: your credit cards are given to you with no collateral backing them since most credit cards require no initial monetary deposit. If you fail to pay off credit card debts, you will receive harassing collection calls and damage your credit scores for certain period of time, but that’s about the extent of it. In contrast, a home equity loan is offered to you using your home for collateral. If you cannot pay your credit cards now, you may also find it difficult down the road to pay for a home equity loan. Later, if you default on your equity loan agreement, you have more at stake and could actually wind up losing your house!
You have lots of alternatives that you can use to get your credit card debt back under control. However the above mentioned debt strategies should definitely be avoided when dealing with credit card debt. Instead of ruining your 401K savings or risking your home, consider establishing a reasonable spending budget, enlisting professional debt consolidation help, paying off more than the minimum credit card payment each month, and you should be able to get your finances back to track eventually.
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