10 Terrible Ways To Get Out Of Debt
Now more than ever, Americans are finding themselves in debt. College has become almost exclusively synonymous with student loans, so people in their 20s are finding themselves owing the IRS before even starting at a fledgling career — and that’s if they can even find a job straight out of school. Credit cards have become an enticing commodity, with credit card companies offering those with even the most meager of salaries thousands of dollars to play with, often with high interest rates attached, leading to the credit card user becoming entrenched in debt. Sometimes emergencies happen unexpectedly, and a few nights’ — or several — stay in a hospital can lead to astronomical bills for those who cannot foresee ever paying it off.
Debt is a common yet panic-inducing situation. Those who find themselves in debt seldom expect it before it happens, and this anxiety can lead to impulsive decisions like asking friends and family for money, gambling, and/or seeking out a fraudulent “debt settlement company” which only serves to increase their financial troubles. The truth of the matter is that paying off a debt is going to take time. There is no bandaid that can be put on a debt to make it magically go away — at least not without a major cost. Blogger Leo Babauta of Zen Habits wrote extensively on getting out of debt the right way, which includes (among other things):
- Putting yourself on a budget: No, it’s not fun to have to cut costs and say “no” to the fun nights out and other fine things that you once enjoyed for a while. However, this is an integral measure in freeing yourself from debt and remember that it is a temporary cost that will lead you to permanently settling your debts.
- Canceling credit cards: We will discuss the dangers that lead to credit card debt and how credit cards can further your debt down the line in this list.
- Seeking out increased income and other income: If your pay is too meager to realistically pay off your debt, it may be time to seek out a greater opportunity or a raise. There are also numerous freelancing opportunities that can serve as supplemental income to help with a debt, and many of these can even serve as creative outlets that are truly enjoyable, such is the case with things like freelance writing.
- Tracking your bills and payments: It is extremely easy to lose sight of what you owe and when you owe it when you are not writing it down, tracking your bank statements, and bills paid. Trust me, I know this from personal experience.
When I decided to become a freelance writer full-time, I suffered from the naivety of one who was following their dreams for the very first time and had also been doing freelancing part-time for years. I would suddenly be able to make just as decent a salary from the get since I would be doing my freelance full-time, right? And because I’ve always loved writing so much, I figured I could just be this machine that fired out prose all the livelong day, watching the fruits of my labor fill my bank account almost effortlessly.
That. Is. Not. The. Case.
Being a writer is extremely taxing, difficult, and scary. It is also something I love dearly and could not picture living a life without it now that I am doing it full-time. That being said, my naivety led me to the beginnings of a spiral that could have led to a boat-load of debt if I hadn’t reigned myself in and made the aforementioned changes listed above. It’s still difficult and I keep myself on a strict budget, but I’m glad I did not take alternatives that I have seen several people take that did nothing but lead to an even greater debt than they had to begin with. Below, let’s take a look at 10 terrible ways to get out of debt.
Asking Friends & Family For Money
Firstly, there is no guarantee that friends and family will be able to help you with your financial struggles, so this one is kind of a gamble from the get anyhow. Moreover, even if a friend or family member is willing to loan you money, you now are only further in debt because you have a brand new debt to owe — to the friend or family member. As far as friends go, I think of introducing the concept of borrowing money the same way I think of introducing romance into the relationship — things can get complicated. Even worse, if you can’t repay the person on time, you could permanently fracture the relationship.
Leslie Tayne noted in an article for Time that borrowing money caused one client to completely alienate his family. Sometimes family members, like a parent, will be quick to offer help and might not even ask to be repaid. However, the allure of this no-strings compensation can lead to dependence. Do you really want to have a family member turn into supplemental income? As relieving as it can be to have that help, it is a temporary bandaid on a problem that you need to find a way to fix permanently. Being able to pay off your debt without the help of friends and family can also be empowering and teach you a valuable lesson about finance and independence in order to avoid falling into debt once again.
Hitting The Casino
On a personal note, there is someone I know who’s gambling “hobby” became a full-blown addiction once they encountered debt. Ironically, it was not the gambling that initially led to any debt. This person had children to support, was recently divorced, and their spouse had been the breadwinner so they suddenly found themselves living far from the means they had become accustomed to. They worked hard, but their paycheck was meager for the bills they had to pay, along with child support and alimony. Suddenly this individual’s weekly poker tournaments turned into nightly visits to a casino. Sometimes they would win a decent amount of cash, while other times they would find themselves $700 further in debt from simply one night of gaming. How do you think casinos make so much money? It’s because the odds are against you, and it is absolutely one of the worst ways to attempt to climb out of debt. I don’t think I need to mention that this is a “gamble,” because gambling is exclusively what casinos are made for.
An extensive post on Living Stingy by Rober Platt notes the various ways that gambling is detrimental to those looking to get out of debt and also notes how gambling can lead to things like crippling addiction and have negative effects on one’s friends and family. “And gambling ruins lives and families. Since it caters to a part of the brain that triggers compulsive behavior, gambling can ruin a person financially. Only people with the strongest of wills can resist the siren song of the shiny, loud casino. However, like much of our society today, financially we cater to the lowest common denominator, and if someone wants to ruin themselves through payday loans, car leases, credit cards or compulsive gambling, then that is their “right” to do so. Society has no right to interfere!”
In other words, steer clear of the casinos, especially when you have a debt to pay off.
Pawning or Selling Your Items
Pawn shops are similar to casinos in that they involve quite the gamble. As AARP puts it, when it comes to pawn shop loans, “If you don’t repay a pawn shop promptly, you can just as promptly lose those treasured personal items.” There are other places like consignment shops where you can sell clothes and other items and you will be given cash (or store credit — obviously not the option you’d choose when attempting to pay off a debt) without fear of needing to pay the store back. However, there are memories attached to items that may have you regretting your choice. I actually have personal experience with this.
When I first resolved to become a full-time freelance writer, I didn’t anticipate the emotional roller coaster that most — if not all — writers experience when first going off on their own. I never was uncertain of my decision, because it was one that came after years of consideration and misery at other jobs where I had salaried pay and benefits, but was not fulfilling what I considered to be my calling. However, the crippling anxiety that can come when you are first starting in this world labeled “freelance” can thrust you into a state of desperation that suddenly your “valuables” and precious mementos don’t seem so precious after all, and the cash they could offer is much more appealing than the memories they may have attached to them. I gathered up so many dresses, jewelry, and the like and sold them for probably a fraction of what they were worth. And guess what ended up happening? Not long after that panic attack, I landed some steady writing gigs that provided enough income for me to be able to get by without having to worry about becoming completely consumed in debt. I didn’t need to sell all those items, and now I wish that I hadn’t. I wore some of those clothes during holidays with family and some of the jewelry items were gifts from people I truly hold dear.
If you have items you sincerely attach absolutely no value to and decide — in a rational state of mind, of course — that they are only taking up space, go ahead and get rid of them and make a few bucks while you’re at it. By all means, though, don’t use this as a tool to get out of debt, and don’t part with items that truly mean something to you.
Playing Musical Chairs With Credit Cards
This falls in line with number 10. Using credit cards to pay off things like student loans or other debts doesn’t achieve anything other than furthering your debt. Just as you have debts to pay off, the debt you paid with a credit card becomes a new debt to repay. Moreover, interest rates are attached to credit cards and can continue to crop up. A dangerous trap to also fall into with credit cards is consistently only paying the “minimum amount due” when your bill comes. The minimum can often be as low as $25 and your interest rates continue to soar the more that you do this. Sometimes people will open various credit card accounts simply to have different credit limits to bounce around and play with, paying only the minimum amount due, and all the while the credit debt rising higher and higher.
Wise Bread writer, Mikey Rox, also notes the dangers of asking for a credit card cash advance, otherwise known as “credit card shuffle.” Rox writes, “Don’t get fooled thinking the rate for a cash advance is the same as your standard rate. It’s usually much higher, and often doesn’t come with a grace period.”
Using Your 401(k)
Although it is available to use as you see fit, borrowing from or cashing out your 401(k) is a terrible idea when it comes to attempting to get out of debt. As Time puts it, “Even though it’s your retirement ‘savings,’ borrowing from a 401(k) or similar investment vehicle is not like withdrawing funds from a savings account. That money has to be paid back with interest and if you decide to leave your place of employment, you’ll have to pay off the loan in full.” Furthermore, Time goes on to note that after borrowing from your 401 (k), your paycheck will become lower, so you are now attempting to pay back a new debt while making less money than you did before, which was obviously not a substantial amount to get you out of your original debt.
Are we beginning to notice a pattern here? Many of the items on this list serve as “quick fixes” that really serve no purpose except to entrench you in a brand new set of financial problems. Let’s take a look at a few more, shall we?
Out of sight out of mind, right? Not exactly. One faulty choice people make when finding themselves in debt is to simply ignore it, leave bills unpaid, and file away their concerns for another time. AARP refers to this tactic as “playing ostrich”, stating that, “When you’re behind on your debts, you may try to relieve your stress by leaving bills unopened or avoiding collection calls. But putting your head in the sand isn’t going to make those debts go away. Your creditors won’t forget about them. Hiding from your debt problems is never a realistic solution.”
There’s nothing worse than a call from a debt collector. Bills can crop up, but it’s difficult to be threatened by a piece of paper — especially when that piece of paper either remains safely sealed in its envelope or is tucked neatly away. Again, out of sign out of mind. Eventually a debt collector will call and they aren’t always going to be polite. Even if they are, the thing you’re avoiding will suddenly become unavoidable as it becomes very clear that, no, they didn’t forget about you and, yes, your debt truly does need to be paid off. I once was in the hospital on a Friday and — much to my dismay — I had to be kept over the weekend because discharge could not be completed until Monday. I never truly understood that, but what I did come to understand is that staying in a hospital is really, really expensive. I also discovered that the health insurance my work provided wasn’t all that great and did not cover that much of my visit. Suddenly I had thousands of dollars to pay off on my own. I could pay off some, but after a while I just decided to avoid the bills until I felt “ready” to deal with it. Debt collectors weren’t privy to my state of mind, just the fact that I wasn’t paying. I got a letter demanding payment and a subsequent call. The upside to this is that once I actually explained my situation and how anxious I was over this monumental bill, the collector worked with me to come up with a plan where I would pay increments of $100 each month and that it would be taken out of my checking account (not my credit card, of course) automatically on the last day of every month.
It took a while, but $100 was what I could swing at the time. And eventually the bill was paid off without me having to choose a different route that would only put me farther in debt.
4. Still Spending Beyond Your Means
If you have serious debt and you haven’t curbed your spending yet you’re quite simply punching yourself in the face. Get a grip on every cent that you are overspending including:
- Cell phones
- Cable T.V.
- Commuting costs
Eliminate all except the most necessary expenses. And, unfortunately, you probably have no clue which are necessary and which aren’t. Go directly Mr. Money Mustache. Start with his “From Zero to Hero” post and read the rest. Now! This will help you understand how to cut off your unnecessary spend and still maintain a badass lifestyle!
Filing “Bankruptcy” In A State of Panic
There are few things that bring greater panic than financial debt. Knowing that you have a monumental bill to pay and no current means to pay it in full can trigger crippling anxiety, which can cause a proverbial fog to drop over our psyches, leading to irrational behavior and impulsive decisions. One of these impulsive decisions can be to file bankruptcy prematurely. It may seem like an inevitability depending on the state of debt you are in, but you want to understand all your options before taking drastic measures, as there are several methods to getting out of debt which can take time, but do not have to involve filing for bankruptcy. AARP notes that bankruptcy “stays on your credit report for 10 long years, making you a financial pariah.”
Refinancing Your Mortgage
Experts everywhere — the ones with your best interest at heart — will instruct you to avoid refinancing your mortgage as a way to cope with debt. Credit/Debt Management Expert, LaToya Irby, states, “When you couldn’t pay your credit card debt, you ended up with a bad credit rating. Securing your debt with your home means you could lose your home and get a bad credit rating when you can’t make payments.” Employ other options before bringing things like your home into play when it comes to debt. If you compromise your mortgage and risk losing your home, not only will you be dealing with the stress of debt — you’ll no longer have a roof to at least protect your head while worrying about said debt.
Using Debt Settlement Companies
Debt settlement companies may seem like a good option and those that are employed by said companies are trained to put your mind at ease, leading you to believe that — as Irby puts it — you have discovered a sort of “refuge” in the midst of your monetary peril. In reality, debt settlement companies are pretty much a scheme that only works to make the company money by enveloping you in more debt and allowing your credit score to take a complete nosedive.
In a 2009 report from CBS News, issues surrounding the scheme that is most debt settlement companies was thoroughly explored. The report noted an investigation that was launched by New York Attorney General Andrew Cuomo, who subpoenaed 14 debt settlement companies across America and one law firm.
“Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation,” he said of the investigation.
What are some of the specific downsides to using a debt settlement company?
- High costs for services. The companies will normally charge “15 percent of your total debt up front,” along with monthly fees.
- Income taxes will be required if the “forgiven debt is $600 or more.”
- You will further injure your credit score.
Moral of the story: when something seems too good to be true, it usually is, as is most often the case with debt settlement companies.