It is all too easy to succumb to various temptations in the mall because of the piece of magic in your wallet called the credit card. Unfortunately if you do not take care it will not be too long when each of your credit card bills would have a huge outstanding because you simply do not have adequate financial resources to even make the monthly payments on each. The amount of debt soon reaches alarming proportions because of the high interest rate applicable on the balance as well as the late fees on account of the payments that you may have missed.
When you credit card debt is spiraling out of control, it is not easy to manage the situation. If you cannot find a decent balance transfer deal, you could consider debt consolidation. It is worth looking for the best egg loans to get out of your credit card debt at the earliest with least hassle. However, instead of taking sensible and rational steps, most people end up making blunders that put them into a bigger financial mess. Hereâ€™s what to avoid:
Blooper No. 1: Paying Just the Monthly Minimum
If you are keen on getting out of the hole you have dug for yourself, be sure to know that paying the minimum due every month is possibly the slowest as well as the most expensive method of resolving your crisis. You will be amazed to learn that it could take you an astounding 22 years to pay off $5,000 by paying the minimum of $112.50 every month if the applicable APR is 15%. Quite apart from that in this period you will end up paying an additional $5,729.21 just in interest.
To warn customers of this trap, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it mandatory for issuers to include a chart in the statement showing the time required to pay off a certain sum when only the minimum is paid every month.
Blooper No.2: Using Retirement Savings to Pay off Credit Card Debt
Apart from jeopardizing your financial security, using your tax-deferred retirement funds could mean that you could end up owing tax to the IRS. Penalties of up to 25% for early withdrawal may also be levied. Instead, if you must, then consider stopping your retirement fund contributions temporarily and use it to pay off your credit card due. However, remember to resume the contribution immediately after clearing the debt.
Blooper No.3: Utilizing Emergency Funds
When you use your emergency savings to pay off your credit card debt, you are exposing yourself and your family to a real crisis if in case there is an actual emergency, like a natural disaster, medical issue or even loss of employment that could prevent you from replenishing the funds for a very long time. If you must, then use only a small percent of your emergency funds to pay off credit card debt.
Blooper No. 4: Taking a Loan against Your Home
Taking a loan against the value of your home is not a great idea as you could potentially land up in a dangerous situation of having to forsake your home, especially as home prices are sinking in many parts of the US. If the home prices do not rebound it could very well mean that you could end up owing more than what your home is worth. Around 6.3 million homeowners are already facing that stark reality.
Blooper No.5: Missing Mortgage Payments
Skipping the monthly payment on your home mortgage to pay off your credit card debt is a really risky step to take as your home may be foreclosed by the financier. Unfortunately an increasing number of people are taking this route as economic depression has taken a huge toll on the value of homes, and home prices are perhaps at their lowest now.
Many homeowners are depending upon credit cards to buy daily essentials and think it more important to keep credit cards valid by making the payments. In comparison, since the process of foreclosure being longer, homeowners take the risk thinking they would be able to resolve their debt crisis before being evicted. However, the strategy remains extremely dangerous and you could end up losing your largest asset.
Nathan Hyde is a personal finance counselor who writes extensively in the print as well as the online media on the dangers of credit card debt and how to resolve them with best egg loans, and other practical techniques.