It’s common to make mistakes when it comes to money, especially if you don’t have the right kind of guidance to manage your funds. People take on more debt than they can afford or don’t have a financial path planned out.
Paying off your debt will rid a huge burden off your shoulders. Whether you’re one of the 54% of college graduates with a student loan, or you’ve taken loans for personal reasons, here are some mistakes to avoid when paying off debt:
Refinancing your debt
Home equity loans and line of credits can lure people into paying off their debt. It can pay off credit card debt and other loans in one fell swoop and all you have to do in return is a single payment at a fixed rate. Though this may seem like a more organized way to deal with a debt situation, it doesn’t always work out.
The first issue that arises is that you are clearing out your unsecured debt by taking on more secure debt. Secured debt is one that’s given on the basis of collateral. You might pay off your credit card debt, but you’re putting your home or vehicle in jeopardy as a result.
You will end up paying a lot more in interest if you use a home equity loan to pay off bills that were at zero interest. Medical bills are one such example of zero interest debt.
Refinancing never really gets rid of the debt, you’re just moving money around and prolonging your payment period and amount.
Borrowing from your 401K
Your 401K fund is your ticket to a comfortable retirement period. The more you’re able to save in this fund, the better your retirement days are going to be. Borrowing from this fund unplugs money from this goal and negatively impacts the compound interest you earn.
Even though borrowing from your 401k has to be paid back with interest, the interest is still coming out of your earnings, so there’s no value addition. The money used to pay this interest is then subject to double taxation, so it’s a lose-lose situation for you.
If you happen to resign or get fired from your job, you will be required to pay back that loan plus interest within 60 to 90 days, making it a highly risky option.
Not verifying your credit report
Your credit score directly impacts your debt. The lower your credit score, the higher the interest rates applied. Financial institutions and creditors assume you’re a high-risk applicant and higher interest payments offset that risk.
It’s essential to have your credit report analyzed by professionals. You’ll be surprised at the many errors that are stated. Credit repair consultants dispute negative items and errors on your credit report, which helps improve your credit score. This, in turn, helps reduce the interest rates on debt. They can also negotiate with creditors on your behalf.
Failing to come up with a payment plan
When taking any kind of debt, you need to have a concrete plan. This plan is based on how much money you earn and any other income you receive. A good payment plan is one that sticks to the schedule, timely payments are made, and you have money left for necessities and miscellaneous expenses.
If you’re currently struggling with your credit score, get in touch with a credit repair and building service like Masters Credit Consultants. Our experts know the intricacies of the process and file disputes against discrepancies in your credit report for you. We also provide free credit consultation. Get in touch with us at 1-844-620-8796 for more information.