1. Money

5 Terrible Ways to Pay Off Your Debt

Expensive and Credit-Score-Damaging Ways to Get out of Debt

By

If you're using some type of debt repayment tactic that shuffles around debt instead of actually paying it off, then you're going about it the wrong way. As you think about ways to get rid of your debt load, ask yourself, “Is this just a quick, easy solution to tide me over or will this really, once and for all, get rid of the debt?” Here are some of the worst (and most costly) ways to “pay off” your debt.

1. Borrow from your 401K

You shouldn’t borrow from your 401K period, much less to pay off your debt. Let’s talk about what happens when you borrow from your 401K. First, your employer may not let you contribute to it anymore until you’ve repaid the loan. Second, your take home pay is less (because you have to pay back the loan) until the money’s paid back. Third, if you leave your job, you’ll have to pay the entire loan immediately or you’ll end up with early withdrawal fees and income taxes.

2. Refinance your mortgage

Another bad idea, especially if your debt was unsecured to begin with. Tying bad debt to your home’s equity isn’t smart. When you couldn’t pay your credit card debt, you ended up with a bad credit rating. Securing your debt with your home means you could lose your home and get a bad credit rating when you can’t make payments.

3. Debt settlement

Though they seem like refuge in a troubled situation, debt settlement companies tend to make the situation worse. For the scheme to work, you have to stop paying your creditors. When the payments stop, the phone calls start and so do the negative credit report entries. Thirty days late, sixty days late. Before long your account’s charged off and your credit score is trashed.

In the end, your creditors may not agree to a settlement proposed by your company. Imagine going through all that and still owing the money. (Note: settling already delinquent debts on your own is a different, sometimes better strategy.)

4. Consolidate with a high interest loan

Debt consolidation may be a solution if you can get a loan at the right terms. If the only loan you can get has a higher interest rate than the average of your credit card debt, leave it alone. Your monthly payments may look lower, but that’s only because the loan is spread over a long repayment period. If you add up the interest you’d pay over the life of the loan, you’ll see that you’re spending more money than if you hadn’t consolidated with that loan.

5. Transfer your balances to other credit cards

Transferring balances to credit cards with those low introductory rates only makes sense when: you are financially able to pay off the balance before the introductory rate expires and you will not use the card to make purchases or take out cash advances. If you can’t transfer the balance under those conditions, it won’t work for you. And, forget about shuffling your balance to a new credit card with a new teaser rate, the balance transfer fees negate the interest savings.

©2014 About.com. All rights reserved.