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Debt is a heavy burden that sneaks up on you when you aren’t monitoring it.
It’s easy to accumulate and tough to eliminate.
In this article, I’m going to show you the worst ways you can deal with debt and how you should actually handle paying it down in a way that doesn’t cause more problems.
#1. Paying Off Debt With More Debt
If you have a lot of unpaid bills from your car, college, or medical work, it can be tempting to use your credit card to just pay everything off.
The reason someone might do this is because it eliminates all the stress from multiple parties asking for money at the same time.
The reason why you should never pay debt this way is because a lot of the time, credit card debt has the highest interest.
So if you are owing money to an institution that is charging you 5% interest, it doesn’t make sense to transfer that debt to a credit card institution that is charging you 17% interest.
Yes, it’s convenient to have all your debts consolidated in one place, but in the long run, it is losing you more money than you would have lost paying each institution separately.
How You Should Consolidate Your Debt
You don’t need to use a debt consolidation institution for this if you don’t want to, you can get a loan from a bank, a credit union, or online lending.
The most important thing to understand is that the interest rate should be LOWER than what you are paying now.
#2. Stop Paying It Altogether
This one is very bad for obvious reasons.
Firstly, it impacts your credit score negatively which can stay on your record for years and years even if you change your mind later on and decide to pay it.
This can make life difficult because not many places will let you rent, buy a car, or buy a house from them with a low credit score.
You’ll even have a hard time finding a good paying job because your credit score reflects your reliability.
Secondly, depending on how high the debt is, this can become a criminal charge. Borrowing an excessive amount of money and never paying it back can land you in court.
Thirdly, it can lead to repossession. If you’ve bought a car or a house and just decided to not pay for it anymore, the bank has every right to kick you out of it because it doesn’t become your property until you’ve paid it off.
Do the hard thing and pay off your debt even if you have to resort to minimum payments, doing the bare minimum will help more than doing nothing and have everything taken away from you.
#3. Using Retirement or Investments To Fund Repayment
When you do this, you are essentially stealing from your future because you made a mistake in the past, this should only be done in extreme emergencies when you have no other options.
When you take from these funds, you are diminishing the return they garner from interest. Even taking a moderate amount can set you back YEARS.
Do yourself a favor, and don’t take from your future to fund your past.
To avoid doing this, you need to use a rainy day fund, 500 dollars is a good start and should cover most unexpected expenses, but ideally, you should have at least six month’s salary saved up.
This is in case you lose your job, and you need to take a break or go job hunting.
Or if you encounter a huge expense that insurance won’t cover.
Consolidate smartly if you’re already up to your eyeballs in debt.
If you want to avoid the debt trap altogether… Budget, Save, and Invest.
Doing these three things, set you up for a great future, and keep away the things that keep poor people poor.
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Originally published at https://forgefinancialfreedom.com on September 23, 2020.
The Worst Ways You Can Deal With Debt was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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