4 wrong ways to pay off credit card debt
By UK CreditCards.com
If your credit card repayment deadline is looming, but it's been a tough month and you're short on funds, it can be tempting to take out another line of credit or take out a cash advance on a different card to pay the bill. However, using high-interest credit to pay your bills can quickly backfire and cause your debts to spiral out of control.
Here are four misguided ways to pay a credit card bill that can lead to significantly more debt:
a payday loan.
Payday loan providers offer consumers short-term loans of small amounts to help pay for unexpected expenses, such as car repair bills, and tide them over until their next payday. Advocates of this type of loan argue that it is not a bad option if borrowers repay the full amount by their next payday.
However,critics point out that if the debt is not repaid on time, extending the term of the loan could cost twice as much as the borrower originally intended due to the sky high interest rates that accompany these types of loans. Additional fees may also apply, which could cause the amount you have to repay to spiral out of control.
your pension fund to pay your bill.
In the UK, the government allows individuals over the age of 55 to withdraw some of the cash in their pension fund in a process known as pension release. This can be a tempting option when you are in financial difficulty, but it could also harm your future financial stability.
The long-term benefits of a pension fund are difficult to replace and so withdrawing from this fund could later cause you to be short of cash when you need it most.
out a cash advance on a credit card.
Cash advances on credit cards are incredibly expensive, but many consumers are unaware of the additional costs. Withdrawing cash from a credit card at an ATM will usually incur a 3% charge, plus the interest rate could double that of the rate for purchases or balance transfers.
a secured (homeowner) loan.
A homeowner loan means that you have to put your house down as a deposit on the loan -- a major risk if you are in a difficult financial situation with no confidence that you will be able to repay the debt on time.
A secured loan should be an absolute last resort due to the huge risks involved. Making late payments on a homeowner loan is risky business and could also cause your interest rate to soar -- perhaps to more than that of your original credit card debt.
Safer ways to pay credit card debt
Luckily, it isn't all doom and gloom when it comes to repaying debts. There are a number of safer alternatives. The following solutions may not be quick fixes, but they are better options for the long term.
- If you do have a good credit rating, search for new credit cards with balance transfer offers. Transferring your high interest balance to a card with a promotional 0% interest rate could help you repay the debt more quickly.
- Create a budget to work how much you could save on other expenses and put that money toward paying at least the minimum amount on your debt.
- Seek some professional debt help from charities in the UK, such as the Consumer Credit Counselling Service. They can help you come up with an alternative plan for paying your debt.
Published: 10 November 2011
- Best credit tips for millennials – If you're a young adult looking for your first card, or your first premium card, here's what you need to know ...
- 5 financial questions you should ask your partner before getting married – Getting married is exciting. But it's also a huge financial commitment. Here are five essential questions you should ask your partner before you walk down the aisle ...
- What to do when your credit card application is declined – Was your application for a new credit card recently denied? Rejection hurts; but you can learn from it. Here are four key steps that you should take to make sure it doesn't happen again ...