4 Wrong Ways to Reduce Your Debt.

You’re more than likely already aware of your financial situation being less than ideal or you wouldn’t be reading this, right? You’re struggling to pay off credit cards, car loans, student loans, medical bills and your mortgage all at the same time you still need to eat, put gas in your car, buy your kids shoes that fit…you know, get your basic needs covered.

Here are the top four way companies making a profit off your debt-reduction attempts will suggest you go about it:

1. Minimum credit card payments. The less you pay on your credit cards, the more money the company makes on the interest they charge you…which ultimately means less money in your pocket. Bankrate proves the point here with this example:

For example, say you have $5,000 in debt on one credit card. Your interest rate is 15 percent, and your minimum payment is calculated by adding interest to 1 percent of the balance. So if you pay the $112.50 minimum required each month, it will take 266 months, more than 22 years, to pay it off. And you’ll end up paying $5,729.21 in interest on top of the original balance.

2. Borrowing against your 401(k). While the attractive low interest rate may look sparkly compared to the dismal 12% or higher of other rates, not only do you have to generally pay back the loan in two years, you’re doubled taxed on it as well: 10% for early withdrawal and income taxes on the amount borrowed. The only one getting closer to debt-free living this way is…well, not you.

3. Debt settlement companies. The word “settlement” itself suggests relief, but if you’re already strapped for cash and eager to pay of your debt, paying a large chunk of change up front to have you debts consolidated at a moderately high interest rate may not be the wisest move for you short- or long-term. A better idea would be to put the consolidation costs toward paying off one of your credit cards altogether.

4. Cash advances. Even though you’re getting money from one of your already in place resources like your credit card or direct deposit, you’re still having to pay a fee of up to 5% just to borrow the money plus interest on top of the amount you took out.

So what are some of the ways you can actually start getting ahead rather than hanging on with your proverbial nose just above water…or the rock tied around your neck?

Create a Payoff Ladder:

1. Line them up. Get all of your credit cards in an order that makes sense to you, whether it be by amount owed, interest charged or any other way that would motivate you to stick to a payoff plan.

2. Pay it off. Focus all of your efforts on paying off the first card on your list while continuing to make the monthly minimum payment on your other ones. Once you get your first card paid off, start chipping away at the next one on the list. Use the money that would have gone to the first card to pay down this one along with any extra cash that comes your way.

3 Repeat as necessary…until you get to the top of the ladder and all of your credit cards bills have been paid off.

The process may seem lengthy in your excitement to be financially stable, but the months of effort it takes to be successful sure beat the years and decades of drowning in interest and owing.

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