How I’m working to escape my bad debt.

get rid of debt

The “D” word…for Debt. Just about everyone is familiar with it, although some people are more intimately acquainted with it than others are. Debt is often the cause of disagreements and unhappiness among couples; and it often tends to creep into your thoughts when you’re busy doing other things, wreaking havoc!

I had so much debt when I got out of college six years ago, from credit cards to tens of thousands of dollars in student loan debt; I was literally swimming in it once I hit the “real world” after graduation. Okay, so who am I kidding? I still have a ton of debt that I wish I didn’t have, and I’ve been in the real world for longer than I care to admit most days.

However, the difference today is that the type of debt I carry now is not the same kind I used to own back then.

I do realize though, that debt is debt, no matter how you look at it: debt is money you just have to find a way to pay back. But there are certain loans you’ll probably prefer to carry, over others.

If you feel the same way, and are struggling with credit card debt, you may want to look into a few different methods to reduce the bad debt as you work on becoming completely debt free. I’ve managed to pull myself out of credit card debt by employing the strategies below:

Methods I’ve Used To Reduce My Debt

#1 Trading bad debt for good debt. This is not the best way to toss the debt, but I’ve tried it. I’ve taken a loan against my husband’s 401K to pay off several credit cards. This comes with a caveat though — that if you do this sort of thing, you MUST repay the loan or face the 10% penalty of early withdrawal.


Here is an MSN article that describes this approach further and also provides us with the pros and cons of going this route:

Borrowing Against Your 401K?

If your 401(k) plan allows loans (most do), you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.

The Pros

  1. There is no credit check.
  2. The interest rate is low.
  3. Paying yourself back provides you a pretty good return relative to cash account returns.
  4. The interest is tax sheltered in the sense that you pay taxes on the interest only upon retirement.
  5. It’s easy and convenient.

The Cons

  1. You’re losing the interest that you would otherwise have in your retirement account.
  2. You’ll need to repay your 401k with after-tax dollars. Future withdrawals will still remain taxable at future tax rates.
  3. You’ll incur a 10% penalty plus taxes if you’re younger than 59 1/2 and don’t pay back the loan.
  4. The loan is a consumer loan so it’s not tax deductible.
  5. This practice can be dangerous if it’s done repeatedly and ends up jeopardizing your retirement.

There’s also the suggestion that you should instead take out a home-equity loan if you happen to own a house. In this way, it’s more likely that you’ll be able to take a tax deduction on the interest you pay. But again, be very careful about this option, since you are putting your house (and for most of us, our biggest asset) on the line!

These are some of the more controversial tactics used to pay down bad debt, so before you try this out, make sure you weigh all your options well.

#2 Set up a new payment schedule. This is one of the better approaches I’ve taken: paying my debt down bi-monthly, instead of once a month to cut back the amount of interest I was paying. If you can’t afford to pay anything more than you’re already paying out on a monthly basis, simply break your current payment amount into two payments and make the payments twice in a month, instead of once. For instance, if you pay $60 a month to a credit card, pay $30 at the beginning of the month and $30 in the middle of the month, and you will actually save on interest.

#3 Consider moving your credit card balances onto a single credit card with a good balance transfer offer — like one that offers 12 months of interest free payments, or gives you a low, fixed interest rate over the life of the transferred balance.

#4 Consider reducing the amount of money you are investing and/or saving in order to pay off debts. This is a good idea if you’re paying more interest on your debt than what you’re earning with your savings and/or investments. Once you’ve paid off your high interest debt, you can bump up the amount you are socking away and investing, and resume your savings plan.

~ooOoo~

A lot of posts on debt reduction and elimination provide general advice on how to go about dealing with your debt, but this post is one that’s less theory (though it’s in line with theoretical advice) and reflects more of what I’ve done in practice, since I’ve actually tried these approaches myself to try and improve my financial situation. I’ve applied these strategies to move away from the kind of debt I wasn’t too happy carrying and am quite satisfied that I’ve been able to chip away at my bad debt. These days, my “new” debt obligations are primarily house and business related. It’s a lot of money, but I feel a little better about paying for a house and business expenses than I did about paying credit cards with high interest, especially since I was paying for things that I couldn’t even remember that I bought with the credit cards!

 
Guest post by Tisha Kulak of The Helpy Helper
Image Credit: The Slipper Brick