People borrow money for many different reasons. Some are understandable; some are obvious mistakes.
When you borrow to finance your education, rent a car, pay off an emergency medical bill, or make a necessary home repair, that’s understandable. When you borrow large amounts of money to pay for luxuries, such as expensive clothing, trips, meals, and electronics, then you’re likely making a financial mistake that you’ll grow to regret.
However, when you’re borrowing money and going into deeper debt just to keep up with your original debt payments, that’s an entirely different level of ill-advised.
You’re essentially paying another creditor just for the privilege of barely keeping up with your monthly minimum payments. By financing your debt, you’re not just borrowing enough to make your payment, you are going to face tacked on interest charges, on top of your other interest charges!
The result is that you’ll end up in more debt than you were in the first place because you decided to tread water with your finances.
Going into more debt just to pay off your current debts is not the solution unless you have a strategy and know exactly what you’re doing.
The wrong way to borrow when you’re in debt
If you’ve fallen into a ton of debt to a variety of different creditors and your total balance continues to go up every month, then one of the most dangerous things you can do is continue on that same course. After all, it’s this kind of spending, and these kinds of financial habits, that have caused you to go this deeply into debt in the first place. More of the same isn’t going to help.
If you’re borrowing to finance a lifestyle that you can’t afford, then you need to stop. It seems simple, doesn’t it? So, how can you tell if you’re living outside of your means?
First, check your attitude. What kind of mentality drives your financial decisions? Why do you spend the money that you spend, and why have you allowed yourself to go into debt? Is it because you were thinking soundly about your long-term financial future? Or, is it because you couldn’t control your impulses and bought things you didn’t really need because you couldn’t bear the thought of not having them?
Often, our attitudes are a mix of the two. We want to be responsible and make sound financial decisions, but we have moments of weakness where we overspend or rely too much on credit. It only takes a handful of those moments for debt to get out of hand.
Second, check your savings. You should be aiming to save a percentage of your income each month, at least 5 percent. That money should be used to build up an emergency fund of at least $1,000 that you can rely on in case of true emergencies so you don’t need to turn to credit. If you can’t find 5 percent of your income to help build savings every month, then you’re probably living outside of your means, even if your means are relatively limited.
Third, check your budget. You should have a budget that dictates how much of your income goes towards certain items each month. If you’re unable to save a significant portion of your income each month, you likely need to find a place to cut back. While the presence of a budget is no guarantee that you’re going to live a financially responsible lifestyle, making a budget is the only way to get a realistic sense of what your means are, so take it seriously.
If you came out on the wrong side of the three considerations above, it’s time to get serious. And, if you’re using credit or debt financing to get by, it’s time to stop and realize that it can, and will, get worse.
The right way to borrow to pay off debt
Before we talk about borrowing to pay off your debts and live a more financially stable lifestyle, we should start with a caveat. If you can afford to pay off your debts reasonably simply by being dedicated and financially responsible, then that’s what you should do. There are three basic steps to it: spend less, earn more, and be strategic.
First, spend less on non-essential things. Some costs are going to exist regardless, such as your rent, car payment, utility payments, grocery bill, and, of course, any monthly minimum payments that you owe on your debt.
Anything that isn’t fixed or essential, though, is a place to cut back. Being more frugal at the grocery store, for instance, isn’t a glamorous way to save money, but it can be extremely effective over time. Cutting out luxuries such as going out to eat or treating yourself to a $5 latte each morning can also add up and save you a ton of money, which you can then put toward paying down your debt.
Second, earn more whenever and wherever you can. You might have a hobby or a passion that you’re able to monetize. Freelancing services make it easy to find part-time contract work, and online stores such as eBay and Etsy help do-it-yourself merchants and artisans sell their wares and make some extra dough. Taking a second job isn’t always a viable option, but it can be a great way to earn extra money fast, and consistently if you have the time. Finally, if there’s a chance for a promotion at work, go for it! That way, you’re not devoting too much extra time or energy to your work life, but you’re increasing your income and becoming debt free sooner.
Finally, be strategic about how you’re going to pay down your debt. By now, you’ve probably realized that just keeping up with your monthly payments isn’t going to cut it. When you only make your minimum payments, you’re just paying down interest that’s only going to compound again next month, keeping you in debt for a long, long time.
There are two popular strategies for paying down debt: the debt snowball and the debt avalanche. Both can be effective if done correctly.
With the snowball, you devote all your extra income at the end of the month toward paying down your smallest debt. You keep up with other monthly minimum payments, of course, but you pay extra on the smallest debt to pay it off as soon as possible. Then, with the money you save on that minimum monthly payment that is now gone, you work toward paying down other debts.
With the avalanche, you focus instead on paying down the debt with the highest interest rate first. This might be a debt with a higher total balance, so it will take longer to accomplish. However, you stand a chance to save a lot more money in the end by reducing the overall amount you pay in interest.
These strategies for paying down your debt without having to borrow more money are tried and true, but they don’t work for everyone. If you need to borrow to pay off your debts, and there is no way around it, consider a few different methods.
Balance Transfer Credit Cards
With a balance transfer credit card, you apply for a credit card with two features: a high-enough spending limit to pay off the rest of your debt, and a 0% introductory APR period.
Using that card, you pay down all of your other debts at once. Then, you start to chip away at that card’s total balance with steady and sizeable payments each month. Since there is a 0% APR in place, you won’t compound interest on your debt for the introductory period, meaning you’ll be paying down your debt and not just paying off interest.
Better yet, since there’s only one payment to worry about each month, you won’t have to worry about the stress of dealing with multiple different creditors. Your total monthly payment may be less than it was before as well, saving you more money each month that you can use to pay down your debt.
The best-case scenario is that you manage to pay off all your debt before the 0% APR offer ends, thereby eliminating your debt and getting your finances back on track.
There are a few catches with balance transfer credit cards, though. First is that you need to qualify for a decent card and gain approval from a credit card company. If your debt has caused your credit score to tank, then it can be difficult to gain approval for a card that’s going to do you any good.
Second is that you need to be able to resist the temptation to actually use the card. When you start to pay down your debts, you’ll all of a sudden free up credit previously tied up with your credit cards. However, if you start to irresponsibly use your new card, then you’ll be throwing fuel on the fire of your debt and wasting the limited time you have with the introductory APR period.
Debt Consolidation Loans
With a debt consolidation loan, you take out a personal loan that you use to pay off all of your debts at once. These loans can come from a variety of different sources, from your local bank to debt consolidation specialty lenders. No matter where you get the loan, though, the ideal outcome is the same: you reduce your debt payments to a single monthly payment, often lower than what you’d be paying with your former minimum monthly payments, and often with a much more forgiving interest rate. You pay off your debt faster and save money each month. What’s not to like about that?
Not all debt consolidation loans are the same, though. The debt consolidation industry is unfortunately rife with lenders charging huge upfront fees without offering much in return. Make sure you research your potential lender in detail before signing anything.
Much like balance transfer credit cards, debt consolidation loans can be difficult to qualify for if you’ve been in a debt for a long time, have fallen behind on your payments, and taken a hit to your credit score. Lenders look to your score to determine your creditworthiness. If they see a low credit score, they begin to doubt your ability to repay the debt. If they offer you a debt consolidation loan at all, it may be at terms that don’t do you much good anyway. It may also be tied to forms of collateral, such as your home or car, which you could run a risk of losing if you can’t keep up with your payments. That’s called a secured loan. It definitely has its place in lending, but it can be risky if you’re not 100% sure that you’ll be able to make single payment. After all, you don’t want to end up worse off than you were before, meaning still in debt but with the bank foreclosing on your home.
These borrowing options can make paying off your debt easier, although borrowing to pay off your debt should never be your first option. Do everything you can to get a handle on your finances on your own, and make sure you stop piling up debt in the process. If you’re still struggling with your debt after all that, contact National Debt Relief for more information about your options. We’ve helped people in debt from across the country get a handle on their financial futures. Just check out our reviews.
