5 Worst Ways To Pay Off Your Debt, According to Rachel Cruze
Written by
Nicole Spector
Edited by
Molly Sullivan
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Eliminating debt is a must for those looking to obtain financial freedom and financial security, but even when doing this, you need to be careful. There are, in fact, bad ways to pay off debt.
Financial guru Rachel Cruze recently posted a video on her YouTube channel discussing the five worst ways to pay off your debt.
Be sure to avoid these debt-paying strategies — however desperate you may be — as they could come with gnarly consequences that may totally defeat the point of becoming debt-free.
Debt Consolidation
The first worst way Cruze sees people make in their attempts to wipe out debt is shuffling debt around. Moving debt around may feel proactive, but you’re not really doing anything effective to getting to the root of the debt or the issues that created it.
“Just because you’re shifting numbers around doesn’t mean that your behavior’s changing,” Cruze said. “And always remember, when it comes to personal finance, your behavior change is what’s going to take you into the future long term of winning with money. It’s not going to be the math.”
One of the primary ways we see people shuffle debt around is through debt consolidation. This is the process of moving all your debts into one place, ideally a place with a lower interest rate. This can absolutely be helpful, but Cruze suggested that it’s not quite the miracle fix people may think it is.
“A lot of these companies end up charging extra fees, and sometimes if you don’t pay in the right way, you get yourself in an even bigger mess,” she said. “The only time I would look into debt consolidation is with student loans.”
Taking Out a Personal Loan
Got major debt? Why not take out a personal loan to knock it all out? Cruze said that though there are a few situations where this approach could make sense, generally, taking out a personal loan to eradicate debt is a bad move.
“You are now taking on another loan — even though all the other loans are going into that loan — so again, it’s just this idea of moving your debt around,” Cruze said. “The sooner you just accept the fact of, ‘OK, here’s all of my debt, and keeping it separate, even though some interest rates might be higher, you actually get more of the behavior change as you’re paying it off.”
Getting a Home Equity Line of Credit (HELOC)
One perilous path homeowners might take when striving to pay off their debts: a HELOC. This is a loan that lets you borrow money against your home’s equity. It’s in the same category as taking out a personal loan.
“What you’re doing is you’re basically stealing the equity from your home and possibly the future earnings of that equity when you pull it out into a loan,” Cruze said.
Borrowing From Your 401(k) Plan
Stashing away money for your retirement in a 401(k) plan? Leave it! Too many people break into theirs early to put the money collecting there towards paying down their debt. This is a terrible move.
“People will go and borrow on their 401(k),” Cruze said. “What’s hard about that is if you don’t realize the fine print, if you leave your job — in some companies you have to pay back that loan within 90 days. Also, you’re unplugging your long-term wealth building play. What could be investing there and making you money, you’re pulling out into a loan.”
The Credit Card Shuffle
Cruze also sees people doing “the credit card shuffle,” where you pay off one credit card with another credit card. This is another way of moving debt around without chipping away at the root problem.
Now, if you are using any of these strategies to pay off debt, don’t beat yourself up. They’re common mistakes. But do change courses. Look into proven methods, like the debt avalanche method or debt snowball method to eliminate debt. And think about the ways in which you can change your behavior to avoid racking up new debt.
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