Paying Off Credit Card Debt - Biggest Mistakes

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Paying Off Credit Card Debt - Biggest Mistakes
Home Equity Loans to pay off credit card and other unsecured debt -

Sure, it's advertised that using a home equity loan or line of credit is an easy way to get out of those "high interest rate" credit card debts. The logic is that the home equity line of credit or refinance loan (debt consolidation loan) interest rate is lower than the interest rates you would be currently paying on your credit cards. You save money. Great! The second rational is that the interest rates on the line of credit or home equity loan is usually tax deductible. Greater still! You save more money.

Based upon the above, many Americans have taken advantage of these types of loans to pay off their credit card bills. Actually, by the end of 2004, the Federal Reserve reported that Americans borrowed a total of $826 billion dollars against the equity in their homes. To put that into perspective, in 1997 (just 7 years earlier), Americans borrowed $416 billion dollars. That's about a 50% increase in borrowing.

So, why are so many Americans still in debt? And if this is such a great idea, why am I against it? Because so many Americans are still in debt, that's why.

You see, if you do the numbers, about two-thirds of the people who use this "great tool" to eliminate their unsecured debt, usually go back out and run up more unsecured debt. This usually wipes out the tax benefits of getting the "rational" loan in the first place.

This type of program not only leaves the consumer with less equity in their home to use in case of real emergencies but exchanges unsecured debt for secured. What you may have been able to eliminate through debt settlement, credit counseling or even bankruptcy, has now been exchanged with the security of your home.

With a major real-estate market correction, many homeowners may find themselves actually owing more on their property that it is worth. It's happened before and not too long ago.

If you have borrowed against your home to pay off credit card debt, pay it back as quickly as possible and make sure that you do not use your credit cards anymore. Tear them up. Don't cancel them (unless there is some stupid usage fee attached for the privilege of using their card). Cancelling them can hurt your FICO score. Just keep one card for emergencies and cut the others up.

Now, let's move onto Borrowing from your 401(k) -

About 80% of all companies out there offer their workers the ability to borrow against their 401k plans. Unless it is a dire emergency, don't do it. Get a home equity loan before you do this. Of course look at debt settlement, credit counseling or bankruptcy before you do either.

According to the Investment Company Institute about 1 in 5 workers have borrowed against their 401k. $6,800 was the average amount borrowed.

The logic behind this type of borrowing is that people think that they are actually borrowing against themselves. They are earning interest off of their retirement plan so what's the harm? At least the money is going back to them right? Yes and no.

If you pay it all back and don't lose your job during the process you are fine. Of course, leaving that money sitting there at 8% interest could have grown to more than $75,000 but I am sure the $6,800 was more important at the time.

Now let's say that you do lose your job, what then? Well, in addition to the $6,800 that you borrowed "from yourself"; the loan must be repaid sooner than later, usually in about a couple of weeks. As you know, most people don't have $6,800 lying around so, the outstanding loan is now taxed and penalized as a premature distribution. Remember, that money is tax free as long as you wait until retirement. If you don't pay it back right away, you've taped in and the IRS will be taping you for their cut. This could end up costing you thousands of dollars more, as the tax and penalties are pretty steep.

So to recap, if you have credit card or other unsecured debt that you need help with, look into debt settlement, credit counseling and bankruptcy as options before you even think about putting your home or future retirement at risk.

As always, to learn about your financial options and managing you debt log onto www.debtreliefoptions.com.

Jon Noble Staff writer Debt Relief Options asktheexperts@debtreliefoptions.com

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Credit Card Trends That Cost You

Between February 2005 and January 2006, the Fed raised short-term rates by 2 percentage points. During that same timeframe, the average credit card interest rate went from 12.84% to 15.75% a nearly 3% increase. You can expect to see these rates continue to rise.

With the forcing of many credit card companies to raise their minimum required payment formula (borrowers are now required to make about 4% as a minimum payment, it used to be 2%), coupled with base interest rate hikes, you can expect to see higher default rates towards the end of the year.

During most of the 1990's about 10 credit card companies controlled about 80% of the market. Now there are about 5 credit card companies controlling the lion share of the market place. At the same time, most consumers already have enough credit cards in their wallets so new credit card applications are getting harder to come by.

This has resulted in credit card companies resorting to stealing a client from another company for growth. They do this by offering the consumer low introductory rates for balance tranfers or rebates on purchases. This may sound good for the consumer by there are a lot of strings attached.

For an example, some issuers are offering a "low interest rate for the life of the balance". However, you must also agree to make a minimum number of purchases with their card. Since your payments are going towards the low-rate balance transfer first, the purchases that you made on their card keep the higher interest rate and could end up costing you.

Some companies have removed the cap on balance transfer fees. It used to be about $75 for the transfer charge, now it can be as much as 3% of the balance. If you transferred $10,000 in credit card debt from one credit card company to another, that fee has now gone from $75 to $300.

Another offer is the "no late fee", as long as you use the credit card once a month. But beware. Unless you are paying the card in full each month, you are only continuing to borrow more since you have to continually use the card, which results in carrying more debt. If you are late on a payment, you may not pay a fee but, you may find your interest rate climbing as much as 30% on your entire balance owed.

So before you take advantage of that great new offer, take the time to really read the fine print. You can review all the latest offers and current interest rates from credit card companies as site like www.creditcards.com or www.cardratings.com.

If you find yourself scrambling to make ends meet or just want to learn more about your financial options, log onto www.debtreliefoptions.com.

Jon Noble Staff writer Debt Relief Options asktheexperts@debtreliefoptions.com




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Paying Off Credit Card Debt - Biggest Mistakes
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