Are you paying off debt the wrong way? - KPTV - FOX 12

Are you paying off debt the wrong way?

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By Andrew Housser

Eliminating debt is an admirable goal. Thousands, if not millions, of people – at least those still dedicated to their New Year’s resolutions – have entered their third week of working to repay credit card, student loan and other debt in 2017. But are they going about it the wrong way? In fact, is there a “wrong” way to pay off debt?

In reality, any effort to pay off debt is worth the work. Yet it is good to know the warning signs of a repayment process that might make your debt problem worse. If you find yourself slipping into any of the patterns below, change your ways to find greater success in your fight for financial freedom.

Forgetting to pay on time. If you do not make your credit card payment on time, the lender will charge a fee. In 2017, late fees can rise to $27 for the first late payment and $38 for an additional late payment within six months. Late payments can have other effects, too. You might lose a zero-interest promotional rate or lose any rewards you earned that month. You also might lose your grace period, so your payment would be due immediately upon making a charge. What to do instead: Set up online access for your account. Then schedule the account to automatically make at least the minimum payment on your due date. Work hard to pay more, and add an additional payment as you can.

Using a credit card for daily expenses. People who buy fast-food meals with a credit card spend 30 percent more on average than people who pay with cash, according to a Visa study of 100,000 restaurant transactions. What to do instead: When grocery shopping, purchasing lunch out, or making other routine purchases, pay with cash – or a debit card. Bear in mind that that extra spending is akin to extra calories. Avoid the calories and avoid the weight. Avoid extra purchases, and you will avoid adding debt.

Consolidating debt into your home loan. It can be tempting to think about withdrawing cash from your home equity to pay credit card bills. You will wind up with one bill, possibly at a lower interest rate. However, rolling those bills into your home puts your residence at risk. If you get into a situation where you cannot make your full mortgage payment, it is very serious. What to do instead: To consolidate debts, consider a balance transfer to a low-interest promotional offer if you qualify. Alternatively, look into a personal loan, which can be especially helpful when credit scores do not reflect repayment capabilities. New independent lenders use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan.

Taking a payday loan to tide you over. It sounds like a good deal: Pay about $15 to get a $100 advance on your paycheck. You will avoid a purchase on your credit card, and the idea is to pay it back in a couple weeks. However, all too often, payday loan businesses count on customers to roll over their loans, borrowing the loan again rather than repaying it. Payday loans can have an annual interest rate of 400 percent. In real terms, over three months, a $300 credit card loan at 16 percent interest would cost $12 in interest, while a payday loan could cost $270. What to do instead: Set aside part of your income –10 percent or more if you can, but at least something – in an emergency fund. Even $100, $500 or $1,000 can make a big difference in handling an unexpected medical bill or car repair.

Raiding retirement funds. With Social Security expected to cover only a portion of most people’s retirement expenses, retirement savings are crucial. Plus, if you withdraw from retirement funds when you are too young, you will lose part of the money to taxes and penalties. What to do instead: For repaying debt, try other options – including debt negotiation, debt consolidation or credit counseling, if necessary – first.

Not paying taxes. Skipping tax payments to repay debt is like jumping from the frying pan into the fire. Eventually, you will face potentially harsh consequences, from penalties and interest to garnished wages and even jail time. What to do instead: Talk to an accountant, tax attorney or tax debt resolution firm. Sometimes, these professionals are able to negotiate a lower payment.

Chasing deals. If you find yourself relentlessly chasing deals, and your pantry is stocked to last a decade, you might be compulsively bargain-hunting. Buying at a discount can be smart, but only if you do so very carefully based on your true needs. What to do instead: Try putting yourself on a spending freeze for a month or two. Challenge yourself to cook all your meals from your pantry stash. Only buy things you absolutely need, and see if you wind up with some extra cash to “spend” on your bills.

Stretching student loans more than you absolutely need to. Education loans have many options for repayment. Some income-based arrangements and extended repayment periods provide relief for people starting their careers. But if you stretch your repayment period for too long, you might be paying for college until close to retirement age. What to do instead: If you cannot pay your student loan, contact the lender immediately. Do not leap into deferment programs, though, if you can make the payments another way. Can you take an extra job or add a roommate to help? Your future self will thank you for today’s sacrifices.

Working hard to get out of debt pays off in the long run. Doing it the right way will reap the rewards sooner. Most importantly, stick to your plan, and keep track of your progress so you know that your hard work is paying off.

Andrew Housser is a co-founder and CEO of, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.


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