Financial Planning

Getting out of debt is a major financial goal for many people. While it’s important to reduce your debt load and try to begin creating wealth it’s also important that you take the right steps toward repaying your debt. In fact, there are a few common methods people use to help them get out of debt that can end up doing even more harm than good. Here are a few things you may want to think twice about in your quest to become debt free. Don’t Use Home Equity to Pay Off Credit Cards
Not long ago using the equity in your home to finance everything from vacations to consolidating debt was all the rage. On paper it often seems like a good idea because you’re able to tap into some hidden money at an affordable low interest rate. And when it comes to consolidating credit card debt this seems like a no-brainer. If you can get rid of all the high interest cards and make one single payment that has a nice low rate that would be a good thing, right?
Not so fast. The big problem with this method has to do with the difference between secured and unsecured debt. Credit cards are unsecured meaning there is no collateral backing the card. If you fail to pay off your credit card you might have to put up with collection calls and damage to your credit score, but that’s about the extent of it.

If we’re talking about a mortgage or car loan we’re dealing with secured debt. This just means that the underlying asset is used as collateral for the loan. Now if you fail to make payments the bank is going to take your house away. If you can’t repay the home equity loan or line of credit you might be forced to sell the house so the bank can recover the money. As you can see, if you use a home equity loan to pay off your credit cards you just traded in that unsecured debt for secured debt and you could lose your home if you can’t keep up with payments.
Better Ways to Pay Off Debt
While using equity in your home and raiding your retirement nest egg aren’t the best ways to pay off debt there are still plenty of good alternatives.

First, create a budget. The single best thing you can do to help you pay down your debt is to create a realistic budget that frees up some extra cash that can be applied to your credit card payments. There is more free money in your budget than you think, so look for ways to find some of that hidden cash.

Next, you need to make more than the minimum payment each month. When you make just the minimum payment on your credit card you’re doing little more than paying finance charges. This means you’ll be repaying this debt for many years.

Finally, you should be living below your means. If you find yourself in credit card debt there’s a good chance that you were living beyond what you could afford. By adopting a lifestyle that requires spending less money than you make you’ll be well on your way to financial security.