Wednesday, October 25, 2017

Risks of Using More Debt to Pay Down Debt

By Patty Moore, a single mom who recently started blogging at Working Mother Life
If you are buried in debt, you are not alone. Debt is a serious problem for many people, and it occasionally it can seem never-ending. If you’re a typical debtor, then you know the consequences that come along with it. For example, it can stop you from purchasing a new car or prevent you from being approved for a loan, especially if your credit score has taken a hit due to it.

One of the most common forms of debt is credit card debt. People rely on their credit cards every day, and consumer credit debt rises each day accordingly. Most people can say they’ve carried a balance at one point, and some people can say they’ve been embroiled in inescapable credit card debt before. Fortunately, there are ways to get out of this debt, but none of them are free.

Naturally, there is are a couple common solutions for people with too much credit card debt, but it often requires them to take on a different form of debt such as a loan or a new credit card. For instance, if someone has $1,500 in debt, they may pay that off with a $1,500 loan. Afterwards, they’ll deal with the loan which would have a different interest rate and payment term.

Often, people choose a personal loan to consolidate their credit card debt, or they will find a cheap balance transfer card to help them make headway. Both of these options can save money, but they can also lead to disaster if mismanaged. Below, we will talk more in depth about why you may not want to take the risk by paying off one debt with more debt.

Personal Loans

As mentioned, a common reason for taking out a personal loan is to consolidate debt. Whether it is the remainder of an auto loan or credit card debt, they turn to a personal loan to cover it all with the intention to pay off that new loan later. One of the advantages is the ability to pay off your old debt immediately, then you are stuck with debt at a hopefully lower interest rate.

While the advantage of eliminating old debt is there, it does not come without some risks attached to it. Mainly, your debt doesn’t actually disappear, and the obligation to pay it is still prevalent. If you don’t pay down the new personal loan diligently, then you’re still heading in the wrong direction as before. If you start spending like crazy after consolidating, then you are in trouble.

There are other risks besides being unable to curb your spending. You could get a higher interest rate on your debt if you aren’t careful; this would cost you more money in the long run. You could deal with origination fees as high as 5.99% or even prepayment penalties which only drive the cost of debt. If you can’t manage your debt or avoid fees, then you are liable to make your situation worse.

Balance Transfer Card

Another common option to pay off credit card debt is the balance transfer credit card. This is where you apply for a low rate credit card and transfer your old debt to this new card. With this move, the new card pays off the debt on the old card which is effectively a transfer. Ideally, this new card will allow you to make headway on slimming down your debt.

If you can effectively transfer a balance and pay down the debt, this is an extremely advantageous move. Many balance transfer card offers offer a zero percent interest rate for anywhere from six to twelve months. If you can pay down the debt in this time period, then you’ll have saved money as opposed to handling it through your old card.

However, a balance transfer card poses some of the same challenges as a personal loan. Once the balance is transferred, the debt still exists to your name. If you start spending on credit again or neglecting payments, you’ll be digging yourself in a bigger hole. Furthermore, if you do not pay off the balance within the introductory timeframe, then you could start incurring fees and interest charges once again. If the new rate is higher than your old card, then you’ll be in worse shape than before, especially if you didn’t make progress on payments.

Final Word

It is not a good idea to pay off debt with debt if you do not have a solid plan moving forward. Personal loans and balance transfer cards offer a way out of debt, but they require you to pay down debt just like before. If you can’t fix the root problem of being unable to make payments, then opting for a new form loan or line of credit only delays your problems with debt.

With that being said, these options can save you money, but you just need to be able to understand the obligations that come with them. They’re not get-out-of-jail-free cards, but they do open up pathways to success, and potentially more problems.

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