You might think that there’s no wrong way to pay off debt because it’s, well, paying off debt. But there are methods that can tank your credit score, make you look unreliable in the eyes of loan providers and creditors, and can simply make your life more stressful. Here are 4 bad ways to pay off debt:
Using your 401k to pay off debt
This might seem like a smart solution, but it rarely ever pays off the way you think. For instance, when you take money out of retirement, you’ll be taxed on it. Taking money out of retirement almost always comes with penalties and fees, so it might not make a huge debt in your debt when all that’s said and done. Plus, that’s years of compound interest on your 401k that you’ll never get back, which only lengthens the amount of time you’ll need to work in order to retire.
Taking out a high interest rate loan
Using what’s called a “payday” loan usually has too high of interest rates to make it worth it as a debt payment method. Interest rates can balloon up and quickly make it much harder to pay the loan off quickly than anticipated. Avoid this route if you can.
Refinancing your mortgage
Using your mortgage to try to pay off your debts is not a helpful strategy because, if it goes badly, you could lose your home and still owe your debts, plus it can decimate even the best credit score when you can’t make your payments.
Ignoring your debts
They aren’t going to go away, especially if you ignore what you owe or stop making payments altogether. This simply makes things worse. You may think you can outrun your debts and make a big payment when you come into money again, but the damage to your credit score and the way this behavior looks to creditors will make it difficult for you to ever take out a loan or open a credit card again.