I’m always amazed by the number of commercials, print ads, and radio jingles dedicated to financial products and services. No matter how much we try to resist, they often get stuck in our heads for months (and sometimes years) whether we actually use the services or not. Remember the FreeCreditReport.com guy with his witty songs about everything from getting married to identity theft? How about all the commercials with celebrity endorsements, from Montel Williams encouraging payday loans to Alec Baldwin telling us to get a Capital One card?
What’s in YOUR wallet?
How do you decide what bank or credit card to use? Most people think first about the companies they’ve dealt with in the past. Then they may remember things they’ve heard from family and friends (or advertisers). Finally, many of us search online for reviews and information. All of those are good ways to learn more about our choices, but what if none of the choices we’re comparing are good ones?
All this exposure to information about saving money and reducing debt can fool us into thinking we know a lot about our options should financial disaster strike. In reality, we may not know the difference between a great idea and a terrible one. Not because people are idiots, but because we’ve been brainwashed by the influences of marketing.
Here are a few common methods people use to reduce debt, save money, or handle an emergency that usually don’t pay off in the long run.
1. Credit card balance transfers
It sounds like the best idea in the world – you have a credit card with a balance, and you can move that balance to a card with a lower rate. Sometimes you can get a 0% balance transfer, giving you the chance to pay off that debt with no interest! You’ll be out of debt sooner and pay less money.
Consider this: What happens if you can’t pay off the transfer before the promotional period ends? Usually a 0% rate is good for six months to a year. Do you know what happens at the end of that time? All the interest that would have accrued over those months is tacked onto your card balance, and the rate is more like 19% or even 25%. If you can’t pay the balance off in time, you could end up owing more than you did in the first place.
How to deal: Divide your balance by the number of months you have at the lower rate. For example, if you transfer a $1000 balance at 0% for one year, you have to pay a minimum of $84 a month to pay it off on time. If the payment isn’t possible for you, DON’T transfer your balance. Instead, focus on paying more than your minimum payment to pay down your debt as soon as possible. And STOP USING THE CARD. You can’t get rid of a balance if you keep adding to it.
2. Debt consolidation loans
I couldn’t tell you how many times I borrowed money to “consolidate” my debt and lower my monthly payments. I let a loan guy convince me that a loan looked better on my credit report than having a bunch of credit card debt. I even took out a private student loan once to pay off debt – I borrowed $9500 in 2004. After 7 years of paying on the loan, the balance is still over $7500. Dumbest idea EVER.
Consider this: Using a consolidation loan can be a great idea, but only if you no longer have access to your credit cards. I was able to cut my monthly payments nearly in half by combining my card balances into one loan with lower interest, but then I went out and charged up my cards again. So I was paying the loan payment AND the credit card payments. Going into more debt to pay off debt doesn’t make sense unless you are very disciplined.
How to deal: If you decide to consolidate your debt, cut up your credit cards. Or give them to a family member. Or melt them with a blowtorch. If you are already in trouble with debt, taking out a loan isn’t going to change your habits overnight.
3. Debt management plans
Some debt management companies are awesome. (Like CareOne Credit, for example.) But many of them are total scams. Essentially, you are paying someone to make your debt payments for you. You are trusting them to use your huge monthly payments to pay off your debt in a certain length of time – but how many times have you read stories about people who were ripped off?
Consider this: Some debt management companies hold your monthly payments in an escrow account until there is enough money to wipe out a debt completely. In the meantime, none of your payments are being made and your accounts are sent to collections. Or the company mysteriously goes out of business and you can’t find a way to contact anyone.
How to deal: If you’re considering a debt management plan, check the company’s rating with the Better Business Bureau. Talk to real people who have used the service before. Make sure you understand EXACTLY what will happen to your money each month, and how it will affect your credit, before you agree to participate.
So What Should You Do?
Too often, we let all the advertising get to us, and instead of understanding the problem, we look for an easy escape. It would be great if you could just transfer a balance or enroll in a program and suddenly have more money. Hell, I’d sign up for that in a heartbeat. But it seldom works that way. Debt doesn’t like to relinquish its grip, and we don’t like to go without the things we’ve convinced ourselves we need.
There are only two ways to get out of debt: spend less or earn more. That’s it. All the options above can provide a temporary workaround, but none of them will help you without some serious lifestyle changes. Believe me, I’ve tried everything else – none of it did a bit of good in the long run.
If you’re struggling with debt, it’s time to decide – would you rather slow the bleeding temporarily with a band-aid, or fix it permanently with stitches? Stitches require more effort and are a little more painful, but a scar is better than a gaping wound. I’m glad that my debt is slowly fading into a scar from the past instead of an emergency that rules my life.
Have you tried any of the “quick fixes” above to get rid of your debt? How did it work out for you?