5 Terrible Ways to Pay off Your Debt

If you're using some type of debt repayment tactic that shuffles around debt instead of actually paying it off, then you're going about it the wrong way. You're not actually reducing your debt. In some cases, your debt may actually be growing instead of shrinking.

As you think about ways to get rid of your debt load, ask yourself, “Is this just a quick, easy gimmick to tide me over or will this really, once and for all, get rid of the debt?” Here are some of the worst (and most costly) ways to “pay off” your debt.

Borrow From Your 401K

Businessman removing coin from middle of stack
Gary Waters/Ikon Images/Getty Images

You shouldn’t borrow from your 401K, period, much less to pay off your debt. Let’s talk about what happens when you borrow from your 401K.

First, your employer may not let you contribute to it anymore until you’ve repaid the loan. Second, your take-home pay is less (because you have to pay back the loan) until the money’s paid back. Third, if you leave your job, you’ll have to pay the entire loan immediately or you’ll end up with early withdrawal fees and income taxes.

When it comes to paying off your debt, borrowing from your retirement fund is a terrible idea.

Refinance Your Mortgage

Refinancing your debt into your mortgage is another bad idea, especially if your debt was unsecured, to begin with. Tying bad debt to your home’s equity isn’t smart. 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.

Debt Settlement

Though they seem to offer refuge in a troubled situation, debt settlement companies tend to make the situation worse. For the scheme to work, you have to stop paying your creditors. When the payments stop, the phone calls start and so do the late fees and negative credit report entries. Thirty days late, sixty days late. Before long your account’s charged off and your credit score is trashed.

In the end, your creditors may not agree to a settlement proposed by your company. Imagine going through all that and still owing the money. (Note: settling already delinquent debts on your own is a different, sometimes better strategy.)

Settling your debts is a lengthy process. Even when it's successful, you'll spend the next few years rebuilding the credit score you lost.

Consolidate With a High-Interest Loan

Debt consolidation may be a solution if you can get a loan on the right terms. If the only loan you can get has a higher interest rate than the average of your credit card debt, leave it alone.

Your monthly payments may look lower with debt settlement, but that’s only because the loan is spread over a long repayment period. If you add up the interest you’d pay over the life of the loan, you’ll see that you’re spending more money than if you hadn’t consolidated with that loan.

Transfer Your Balances to Other Credit Cards

Transferring balances to credit cards with those low introductory rates only makes sense when you are financially able to pay off the balance before the introductory rate expires and you will not use the card to make purchases or take out cash advances. If you can’t transfer the balance under those conditions, it won’t work for you. And, forget about shuffling your balance to a new credit card with a new teaser rate, the balance transfer fees negate the interest savings.