© 2010 HelpSaveMyDollars.com All Rights Reserved.
The "Don'ts" of Credit Card Debt
During these tough economic times, credit card debt is a common occurrence. Aside from the techniques
on how to pay off credit card debt (which HelpSaveMyDollars.com outlines in our Credit Card section), there are some things that you
should not do when trying to pay off credit card debt! Consider the following:
1. Home Equity Loans/Lines of Credit - Let's
say you have $50,000 in credit card debt! You're struggling to pay it off and it seems as if this debt will continue to haunt
you for the rest of your life (excuse our dramatic tone!!). You realize that you have some equity in your home (equity is the
difference between the value of your home and the amount you owe on the mortgage). You then decide to take out a home equity
line of credit or a home equity loan (this is where you tap into that equity in your home) to help you pay off this $50,000 in credit
card debt! You pay off the credit card debt but you now have a $50,000 home equity loan/line of credit to pay off, which is
secured debt - this means if you lose your job and can't pay off your home equity loan/line of credit, your home will go into foreclosure!
If you had left things the way they were and kept the credit card debt (which is unsecured debt, meaning creditors can sue you,
but cannot come after your home), then if you lose your job and are simply unable to pay the minimum payments on this debt, there’s
not much the creditors can do. You still owe this money to them, it’s just that if you don’t have the money, you don’t have
the money! In a home equity line of credit situation, if you don’t have the money to pay that off, chances are they’re going
to take your home. If you have credit card debt, don’t take out a home equity loan/line of credit to pay it off. Instead,
visit our Credit Card section for ways to pay it off.
2. Using other Credit Cards – Many times people ask, “Can I
use Card A to pay off Card B?” No! This doesn’t make any sense!! You’re not paying off debt – you’re simply moving
debt from one card to another. You can, on the other hand, do what’s known as a balance transfer, where you transfer your debt
from one card to a balance transfer card that has a 0% interest rate or a 3-4% interest rate – but these low rates only last for 6
months to 1 year.
3. 401(k) – It is a huge mistake to remove money from your 401(k) or 403(b) account and use that
money to pay off your credit card debt!! The money in a 401(k) account is money that you’ve never paid taxes on. The moment
you withdraw money from a 401(k), you’ll owe ordinary income taxes. And, if you are under age 59.5, you’ll owe a 10% penalty! This also makes no sense. To pay off $50,000 in credit card debt by removing money from your 401(k), you need to withdraw a
lot more than $50,000 to compensate for the taxes and that 10% penalty. Also, any money in your 401(k) account is protected
should you ever claim bankruptcy in the future, so it’s not a good idea to start depleting money in your 401(k).
If you
have credit card debt, keep it simple! Stick to the conventional ways of paying off credit card debt (as outlined in our Credit
Cards section). If you start panicking about your credit card debt and resort to the ways above to pay it off, you’ll most likely
end up in a worse situation.
You may be thinking right now, “So what do I do if I have credit card debt?” Again, our Credit
Card section is full of ways to pay off credit card debt. You have the power to pay it off – believe in yourself!!
