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Wrong Ways to Pay Off Debt

11 bad financial moves that could put you deeper in the hole

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En español  |  None of us wants to have big debts hanging over our heads. There are smart ways to get them under controltight budgeting, for instance — but also a huge number of bad choices that may just dig you in deeper.

So don't make any of the following 11 mistakes if you're trying to get rid of your mortgage, car loan or credit card balances once and for all.

1. Gambling

According to a 2011 survey from the American Gaming Association, 58 percent of all casino visitors are 50 or older. It's one thing to hit the slot machines or blackjack tables for some brief, leisurely fun. But if you're deep in debt, don't count on striking it rich in Las Vegas or Atlantic City.

The odds are against you, whether you bet small or large. After the momentary thrill of the wager is gone, you'll still be in debt, probably even more.

2. Misusing a home equity loan

If you've racked up high-rate credit card debt, you may be tempted to tap the equity in your home to pay it down. But perhaps your debt problem is a result of overspending and you haven't changed your spendaholic ways — you'll just run up your credit cards again. Or maybe you've lost a job and you're still out of work. In these instances, a home equity loan won't fix the underlying issue. And if it becomes unaffordable, you could be putting your home at risk of foreclosure.

3. Borrowing from a family member

If a relative offers to lend you money to pay off debt, don't be quick to accept. What happens if — for some unforeseen reason — you can't repay on time? Your relationship with that person could go sour in a hurry. Could you live with that? It's simply not worth risking a relationship.

4. Playing ostrich

When you're behind on your debts, you may try to relieve your stress by leaving bills unopened or avoiding collection calls. But putting your head in the sand isn't going to make those debts go away. Your creditors won't forget about them. Hiding from your debt problems is never a realistic solution.

5. Getting a payday loan

Payday loans carry notoriously high interest rates, often in excess of 400 percent annually. You would do better to look for funds almost anywhere else. Older Americans on a tight budget should be particularly wary of online lenders offering so-called Social Security payday loans. You get quick cash — usually about $300 to $500 — in exchange for agreeing to turn over some or all of your benefits check when it arrives. Don't be fooled.

AARP Money Expert: 10 Worst Ways to Get Out of Debt

Avoid illegal activity of any kind, no matter how much you want to get out of debt. — Photo by Julian Hibbard/Getty Images

6. Taking a credit card cash advance

Cash advances are another very high-cost way to borrow. The interest rate is often more than 10 percentage points higher than your standard rate. And you typically have to pay fees of 3 percent of the transaction. Keep in mind that a cash advance is just another loan you have to repay, so it's in fact adding to your debt.

7. Kidding yourself about a pawn shop "loan"

You might think that taking your fur coats, jewelry or other valuables to a pawnshop is a good way to get fast cash. It's not. If you don't repay a pawn shop loan promptly, you can just as promptly lose those treasured personal items. You'll never be able to enjoy them again or leave them to your kids or grandkids.

8. Using a debt settlement company

Debt settlement firms tout themselves as a good solution for consumers in debt but they charge high fees, often many thousands of dollars. And after you "settle" your debts — by paying way less than you owed — you wind up with a terrible credit rating and a big bill from the IRS. (The agency views forgiven debts as income and wants you to pay taxes on them.) So if you're up late one night worrying about your bills and you see one of those infomercials promising to help you settle your debts "for pennies on the dollar," do yourself a favor and flip the channel.

9. Filing bankruptcy unnecessarily

Sometime bankruptcy is necessary, like when you have insurmountable medical bills or credit card debt you'll never be able to repay. But since bankruptcy stays on your credit report for 10 long years, making you a financial pariah, it should only be used as a last-ditch option. It shouldn't be employed to wipe out small obligations.

10. Giving postdated checks to creditors

When bill collectors come knocking, they'll sometimes urge you to give them a postdated check if you don't have the cash on hand. That's risky business. Your economic circumstances could change in the future and if you bounce checks, that will just set you back further financially. Plus, unscrupulous creditors have been known to cash postdated checks prematurely.

11. Doing anything illegal

This should go without saying, but you should avoid illegal activity of any kind, no matter how much you want to get out of debt. Unfortunately, people of all ages — including older Americans — have been known to steal, arrange to have their cars stolen or even set their homes on fire to collect insurance money. These actions not only are illegal and morally wrong, but also could cost you a lot more than money. You may wind up in jail, losing your personal freedom. No amount of money is worth that — not even enough money to pay off every last cent that you owe.

Lynnette Khalfani-Cox, The Money Coach(R), is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom.

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