When you’re in debt, there are shortcuts you can take to reduce the amount of interest you’re paying or even the amount of money you owe. They can be tempting but be aware that each of these shortcuts comes with a risk. If you don’t pay attention to these details, you may wind up losing money to interest and fees that could have been spent paying off your debt.
1. Balance transfer cards. Balance transfer credit cards are frequently used to move unsecured, high-interest debt to a credit card with a zero percent interest promotional period.
Depending on the card, the zero percent interest period typically lasts anywhere from 6 to 18 months. During that time, the money you save on interest can be put towards your balance.
This shortcut can help you eliminate debt faster if you’re consistent about paying your interest savings towards your debt. One caveat: most cards charge a balance transfer fee of 3 percent.
The risk of balance transfer cards is that you treat the promotional period as a time to ignore your debt instead of paying it down. If you don’t pay down your balance then all the transfer did was delay your debt problems. Additionally, you’ll make matters worse if you continue to add charges to the card during that time.
The good news? This risk is purely behavioral—meaning there are no terms and conditions stopping you from using this shortcut to your advantage. The key to using balance transfer cards appropriately is to stay disciplined about paying off the balance. Occasionally you’ll find cards that don’t carry or waive the balance transfer fee, which can save you even more money.
2. Debt consolidation.
When credit was easier to come by, a common way to consolidate debt was taking out a home equity loan and using it to pay down higher interest credit card debt. The big risk there is you’re taking unsecured debt and turning it into secured debt. Consequently, if you default on the loan, you could be putting your home at risk.
There are non-profit organizations and for-profit debt relief companies that will negotiate with your creditors the terms of your debt, such as interest rates and monthly payments. Typically, you make one consolidated payment to the debt relief service and they pay your creditors.
After you’ve made a certain number of payments, the debt relief service may try to convince your creditors to lower your interest rate and potentially your monthly payments. One thing to be aware of is that lowering your monthly payments by simply extending the term of a loan is going to keep you in debt longer and cost you more in interest.
While there are legitimate companies that provide this service, unfortunately there are many that have a long list of complaints at the Better Business Bureau—many of which take advantage of people trying to get out of debt.
Some of the deceptive business practices to watch out for are charging higher than advertised fees, enrolling you in a program without your consent, failure to provide promised services, or charging fees before getting any results. Check www.BBB.org and do your research when shopping for debt relief services.
3. Debt settlement. Some of the companies that offer debt consolidation services also provide debt settlement. They not only try to lower your interest rates but also attempt to reduce the amount of debt you owe.
Reducing your debt balance is enticing but you should be wary about which company you work with. It’s important to take the same care as when you’re looking for a reputable debt consolidation company.
When you trust a debt settlement company as an intermediary between you and your creditors, there’s a risk they could keep you out of the loop. If you’re not making payments to your creditors, they’ll come after you—even if the debt settlement company is to blame for the accidental or intentional miscommunication.
Some debt settlement companies will actually hold off making payments to your creditors so that the creditors become more willing to negotiate. While this may be effective as leverage for lowering the amount you owe, it can hurt your credit score. It doesn’t nearly have the same negative impact as declaring bankruptcy but the missed payments will show up on your credit history for several years.
If you don’t trust a company to work on your behalf, there are tools you can use to help negotiate your debt on your own. Whether you negotiate it yourself or use a third party, the IRS considers forgiven debt to be taxable income.
Reduce your risks. If you do your research and read the fine print, these shortcuts can help you climb out of debt faster while avoiding the risks of more fees and damaging your credit. Even more important than minimizing the fees you’ll pay is making a plan to stop adding to your balance, so you’re not fighting a never-ending battle against debt.
How did 21 ordinary people collectively pay off more than $1.7 million in debt? Ben Edwards shows you how in his upcoming book Get Out of Debt Like a Debt Hero, his contribution to the DebtMovement.