Pitfalls to Avoid While Paying Off Credit Card Debt - Happy Blue Pig (2024)

Credit card debt in America is at an all-time high. Per Statista.com, Americans owe a total of more than $1 billion in credit card debt in 2023. Paying off your credit card debt will bring you freedom, and open new possibilities for your future. If you’re ready to pay off your debt, you’ve probably looked into different strategies you can use to get out of debt faster. Some strategies have very few downsides, like credit counseling. Other strategies are risky and should only be used with extreme caution. Here are6 common pitfalls to avoid while paying off credit card debt.

Not sure where to get started in paying off your credit card debts? Click here and follow the simple steps to make a plan.

Uncontrolled Credit Card Use

Now that you recognize the problem of credit card debt, the uncontrolled use of your credit cards has to stop! Take an honest look at yourself and set some boundaries for how you will use your credit cards.

Even though credit cards got you into the debt, it may not be a good idea to cut them up or completely stop all credit card use. If you stop using a card, the lender can reduce your credit limit or even cancel the card. This can impact your credit score, as it will cause your amount of available credit to drop.

Some people think credit scores don’t matter, but I live in the real world and sometimes they really do matter. If you want to get an apartment and a landlord needs to see a credit score, you don’t want a poor credit score. It’s not fair that your credit score drops as you are taking steps to improve your financial health, but unfortunately that is how it is calculated.Click this link to learn more about how credit scores work.

So what can you do? Use your credit cards regularly for budgeted expenses and pay off the expenses for each month in full. Whatever you do, it needs to be intentional.Here are 3 different strategies for credit card use while paying off your debt:

1. Use credit cards for any budgeted expense

Nothing is wrong with this method, but it does take the most self-control. When you are using a credit card to pay for a new pair of shoes you need, will you be tempted to also buy a pair of boots that is not in your budget? If the answer is yes, then you shouldn’t be taking your credit cards along when shopping. But if you have iron-clad resolve and can stick to the spending plan, buying only the things you need, then go ahead and use the credit card for a budgeted expense.

2. Leave your credit cards at home, use them to pay a fixed, recurring payment.

To be absolutely sure that you aren’t tempted to buy extra with your credit card, leave it at home. Delete the credit card information from your online accounts. Then set up a fixed, recurring payment from your credit card for a budgeted expense. Some examples would be life insurance, mortgage or rent, TV or streaming services, or your cellphone bill, especially if you can get a discount for autopay. Then each month, pay off that expense in full.

3. Freeze your credit card in ice.

So you just can’t trust yourself around credit cards? Freeze them in a block of ice. It sounds like a joke but it’s not – it’s a tried and true strategy to stop impulse buying. Commit beforehand that if you need to use a credit card, you will wait until the big block of ice melts. Don’t cheat and use a hammer or ice pick! This ensures that you will put some thought into your purchase. Instead of using credit cards, use cash or write checks so that you feel the pain of spending. It might make you think twice and spend a little less!

Paying off your credit card debt by taking out a personal loan

If you can get a low interest rate, you can save money and pay off debt faster with a personal loan. It can also be nice to have just one payment, just one debt to focus on. However, many people then find it difficult to keep their credit card spending under control. It may start small, with just a few expenses on the credit card and then next thing you know, you have accumulated debt again. You might end up in more debt than before, so be very cautious if you use a personal loan for paying down credit card debt.

Debt Settlement

We’ve all seen the commercials for debt settlement companies. They all make debt settlement sound pretty fabulous. But there are big downsides you need to be aware of before you contact a debt settlement company.

It hurts your credit score

First, debt settlement companies do help you settle your debt for a fraction of what you owe, but they do it at the expense of your credit score. They will tell you to stop all payments on your debts, saving that money as a lump sum. Then they will settle with the creditor using that lump sum. Of course, as a for-profit company, the debt settlement company will also want some of your money. And because you stop paying on your debts, the accounts become delinquent and your credit score drops.

Taxes

Did you know you will have to pay extra taxes with debt settlement? That’s right. You can be taxed on the amount of debt that is forgiven by the credit card company, because it is considered your gain.

Morally, it’s pretty questionable

I believe that debt settlement isn’t very ethical. After all, we have debt because we spent the money. We’re being charged interest based on terms we agreed to when we opened the account. It is right that we pay back what we owe. That doesn’t mean we shouldn’t try to get a reduced rate – definitely try to do that. However, I do think that morally, we shouldn’t withhold payment on our debt if we were able to pay.

If you are a Christian, there’s some pretty specific instruction on this in the Bible. Psalm 37:21 states, “The wicked borrows but does not pay back…” and Romans 13:7 states, “Pay to all what is owed to them…”. Biblically, it’s best to live debt free, but when you are in debt, it is right to pay back what you owe.

If you feel that you can’t get out of debt without help, please look into credit counseling instead of debt consolidation.

Borrowing from your retirement accounts

Please, please, please, do not borrow from your 401k or other retirement accounts to pay off debt. There are so many downsides, and very little benefit to this. If you take money out of your retirement accounts, you may need to pay taxes. You may have fees, like early withdrawal penalties. You may take a loan from your 401k, lose employment at the company, and suddenly need to pay it ALL back. Yikes! On top of that, you will be losing out on the growth your money would have if it stayed in your retirement account. Even if you pay yourself back in a few years, it could result in loss of $100,000 or more when you retire depending on how much you borrow and for how long.

Using a Home Equity Loan to pay off credit card debt

Never use a Home Equity Loan to pay off credit card debt. Credit card debt is unsecured debt. That means that it doesn’t have an asset as collateral for your debt. Things you purchased are never seized or repossessed due to credit card debt. But a home equity loan is secured with your home as collateral. By taking out a home equity loan to pay off credit card debt, you are essentially taking an unsecured debt and trading it for a debt with your home as collateral. Now, if you can’t make your payments, they could take your home! In my opinion, the reduced interest rate is not worth the risk of losing your home. Use other strategies to get a reduced interest rate.

Bankruptcy should be a last resort

Filing for bankruptcy can eliminate your credit card debt, but you need to seriously consider the lasting negative consequences. You may need to sell off assets, and while credit card debt can be eliminated, some other types of debt cannot be eliminated. A bankruptcy stays on your credit report for 7-10 years. During that time, you will have a poor credit score that you can rebuild over time, but it will take work. It will be very hard to obtain credit for anything during that time. If approved for a credit account, you will probably get high interest rates.