When you are faced with any sort of debt, it can be tempting to find the quickest and easiest solution of the day to pay it off. However, these are actually weak ways to deal with your debt, and can result in more problems and sometimes even more debt down the track. Unfortunately, if you are struggling with debt, you may not be able to see which strategies are the weak ones, so here is a list of some weak ways to pay off debt, that you should avoid.

1 Using your balance transfer card

Signing up for a balance transfer card is a very financially sound way to get control of your debt as it allows you to transfer the balance from a credit card charging you high interest, to one which charges you a low or 0% interest rate so more of your payments go towards your debt, and you have a fighting chance of paying down your balance.

However, this debt payment strategy is weakened when you spend on your balance transfer card. Purchases made on a balance transfer card don’t usually enjoy the same low rate as your transferred balance, instead they attract a higher purchase interest rate; an interest rate you will be paying until you have repaid your balance because credit card payments go towards the oldest balance first. Therefore, you won’t even be able to benefit from interest free days because you won’t have paid down you transferred balance before your new purchases start accruing interest.

2 Consolidating your debts

Consolidating all your credit card and personal loan debt into one new loan can seemingly make the payments easier to manage. However, a debt consolidation loan usually has a higher interest rate than what you were paying on your debts individually so a consolidation loan is actually costing you more. Plus, by consolidating debts such as a credit cards into your mortgage when you open a home loan account wipes out your credit card debt for now, but also means you are now repaying that debt over thirty years, which is much longer than you would be repaying your credit card debt for if you paid it off alone.

3 Declaring bankruptcy

Clearing your debts by going into a chapter 11 bankruptcy wipes out a lot more than just your bills. When you go into chapter 11, you have to wait an additional seven years for your debts to be cleared from your record for you to start fresh. This means it is almost impossible for you to get any form of credit from a mobile phone contract or electricity provider, to a car loan or credit card. Therefore, try and remember that chapter 11 is not only a weak option, but one which should only be used in extreme situations.

4 A payday loan

Getting a loan against your next pay check to pay your bills is a weak way to pay off your debt because you are essentially using one form of debt to pay another. Instead of borrowing against your pay check to make a credit card payment, try and negotiate with the credit card provider if you are unable to make a payment. A bank or credit card company is a lot more likely to be understanding and lenient – even setting up a payment plan where you pay a little each week – as compared to the companies which offer payday loans. Realistically, if you can’t pay the bills you have now, taking on the debt of a payday loan will be hard to repay too and the companies which issue payday loans are usually a lot less understanding if you can’t pay, charging you very high interest rates and taking any measures necessary to get their money back.

5 Using a high interest savings account to save up for your debt

You may think you can accumulate enough money in a high interest savings account to repay your credit card balance, but the interest rates on most high interest savings accounts are nowhere near as high as those you are paying on your credit cards. Therefore, you’re still paying more interest on your debt, than you’re earning on your savings, so you would be better off directing the money destined for your savings account to your debt to pay it off sooner and stop paying interest all together.

6 Paying off someone else’s debt

It is possible to have someone else’s debt transferred into your name, so you can make the repayments for them. It may be a friend or family member who has gotten into financial trouble, but taking on the responsibility of their debt is not going to help anyone. Firstly, if you become legally responsible for someone else’s debt, and you fail to make the repayments it affects your credit file, not theirs; plus if the relationship becomes strained or breaks down, the debt is still officially yours. Secondly, point out to your friend or family member that having someone else pay their bills is a weak way to pay off debt, so rather than helping them by taking on their debt, you’ll help them find a strong way to repay it.

7 Ignoring your debt

This is possibly the weakest option of them all, because nothing is ever gained by denial. If you ignore your mounting debts and fail to make repayments on those debts, the people you owe money to will keep a record of your behavior. If the situation continues your creditors are likely to report your failed payments and that report goes into your credit file. This puts a nasty black mark on your credit report and anyone you do business with in the future will see you are marked as someone who doesn’t pay their bills and meet their obligations. Having a blackened credit file can affect you now and into the future, in situations you may not even have imagined; for example, what if you get married and want to buy a new home with your new spouse but have a bad credit rating, or what if your children need you to be a guarantor on their home loan in the future?

These weak ways to pay off your debt are simply short term solutions to bigger problems and taking any of these paths will create more issues in the long term than it solves. Instead, talk to a financial advisor or accountant, who can help you find a strong solution that can go the distance.

Photo: Andres Rueda

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: loans, personal finance