5 Debt-Repayment Tools To Avoid (or Use Judiciously) If You Want To Be Debt Free
Written by
Martin Dasko
Edited by
Molly Sullivan
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American consumer debt reached $17.1 trillion in 2023, with the average consumer credit card debt balance hitting $6,501, according to Experian data.
If you’re one of the many people struggling with debt, there are a number of debt-repayment tools offered. But not all of them will help you as much as you might think.
Balance Transfer Credit Cards
While some financial experts will advise using any tools you can find to help pay off debt, others are vehemently against this option.
Personal finance expert Dave Ramsey is notably against balance transfer credit cards; he has stated that you’re placing a Band-aid over a hole on a sinking ship and could stay in debt longer. He feels that these balance transfers give you a false sense of security because it will feel like you’ve handled the issue when you’ve just extended it.
One of the biggest issues with a balance transfer credit card is that you’re just moving the problem around if you don’t address what got you into debt in the first place. If you struggle with credit cards, getting another one won’t help your situation.
While a balance transfer credit card won’t always work, if you’re close to paying off debt and want to save money on interest, then it’s the right choice. You just have to remember that the zero percent introductory offer won’t be there forever.
Debt Consolidation Loans
With a debt consolidation loan, you place your debt under one umbrella to simplify your payments so you can focus on paying it down. While there are benefits to turning multiple payments into one, you’re not addressing the main issue, and you could end up extending your repayment period. These loans also come with balance transfer or origination fees that may add to your debt.
A debt consolidation loan makes sense only if you can’t keep up with all of your debt payments and want to track them more easily.
Home Equity Loans
The goal is to tap into your home’s equity to pay off unsecured debt. This may seem straightforward; but, if you don’t manage your home equity loan property, you could lose your house or get into further debt.
This type of debt repayment tool works only if you’re disciplined with your finances and have a strict plan for the funds that you plan on borrowing.
Debt Settlement Programs
A debt settlement program involves trusting a company that will help you reduce your debt by working with your creditors. However, there aren’t any guarantees that the company will help you out, and you could end up staying in debt for longer.
“Debt settlement companies often promise to negotiate with creditors to reduce your debt, but their services can come with high fees and potentially negative consequences for your credit score,” noted Alex Adekola, CEO and founder of Ready Adjuster, an insurance adjuster.
Here are a few other major issues that could come from working with a debt settlement program:
- Creditors don’t legally have to work with these companies
- You’re going to hurt your credit score when you stop making payments, as suggested by the company
- These debt companies will charge you fees.
There’s nothing wrong with contacting a debt settlement company, but you don’t want to rely on it.
Borrowing Money From Retirement Accounts
“Borrowing from retirement accounts, such as 401(k)s or IRAs, to pay off debt can provide temporary relief but may result in long-term financial setbacks due to lost investment growth and potential tax penalties,” Adekola said.
While this may seem like a simple solution, it will harm your future finances, and you’ll have to deal with penalties and taxes. You’re also not addressing the primary issue that’s causing you to get into debt in the first place.
“Some of these strategies may provide short-term relief but can ultimately make debt problems worse by increasing the total amount owed and damaging your financial health,” Adekola said. “Instead, effective debt management strategies include creating a budget, prioritizing high-interest debts, negotiating directly with creditors and seeking assistance from reputable credit counseling agencies.”
Better Options for Paying Down Debt
What can you do if you want to pay off debt but aren’t sure where to begin?
Choose a Debt Payment Strategy
“By addressing debt proactively and developing a realistic repayment plan, individuals can work towards long-term financial stability and avoid the pitfalls of ineffective debt management strategies,” Adekola said.
You want to think of finding a debt payoff system that you can realistically follow instead of looking for a quick fix to a long-term issue. Here’s what you need to do when deciding on a debt payment plan:
- List your debts
- Make minimum payments on all of your debt
- Then, decide which debt payoff strategy you want to use.
Two popular methods for paying down debt:
- Debt snowball. The goal with the snowball is to build momentum by focusing on paying off your lowest balance first by making additional payments.
- Debt avalanche. With this system, you focus on paying down the debt with the highest interest rate first.
Try Budgeting Apps
There are various budgeting apps you could use to create a financial plan that you can realistically follow. Budgeting tools such as Goodbudget, PocketGuard or YNAB (You Need a Budget) can help you track your spending to know where your money is going. These budgeting apps and tools can help you get better control over your finances so you can pay off your debt and stay debt free.
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