Everyone knows that getting rid of credit card debt is one of the best steps to take on the road to financial freedom, but how you pay off those debts can affect your finances as well. There are some good methods and some bad methods to pay off credit cards and the ones that you choose will determine your financial stability afterwards. Choosing a sketchy method could cause you to spend more money than you were paying in interest and fees on the credit card. Here are some of the worst ways to use to pay off your credit cards.
Using The Money You Saved For Retirement
Using the money that you have saved for retirement to pay off your credit card bills is one of the worst financial choices you can make. If you withdraw the money from the retirement account completely, you will be facing early withdrawal penalties and tax charges. If you take out the money as a 401(k) loan, you will still be paying interest and will miss out on the compounding interest you would have earned if the money had been left alone. Instead of resorting to raiding your retirement account, look for ways to earn or acquire additional money from other sources to pay off your credit cards.
Tapping Your Home Equity
Tapping into the equity of your home is another bad decision when it comes to paying off your credit card bills. Even if low interest rates make refinancing your home to take out equity or opening a home equity line of credit look attractive, you are still swapping one type of debt for another type of debt. Instead of swapping debt from one form to another, find a way to eliminate the debt completely, either through increasing your earnings or using other savings to pay down the debts.
Applying For A Payday Loan
Trying to pay off credit card debt by taking out a payday loan will be an exercise in futility. The interest rates for payday loans are much higher than the interest rates for most credit cards when calculated on a per annum basis, meaning the payday loan will cost you more than you would have paid in interest and fees on the credit card balance. If you truly want to become debt free, do not take on new debt to pay off old debt. The only way to become debt free is to earn more money to completely eliminate the debt that you are carrying.
Anything that’s going to cost you a higher interest rate is definitely out of the question, and I can’t imagine any payday loan is going to have a low interest rate.
One of the best ways I’ve tried to pay of my credit card debts and to finally cut it out of my life is to have a simpler lifestyle. Sometimes, we tend to live so lavishly even more than we can earn that is why we end up caught into debts and sacrifice more important things like insurance and retirement savings.