There is plenty of get out of debt advice available on the Internet. In addition, your friends and family might offer their advice on the subject matter. If you don't know much about personal finances and managing debt, listening to experts, a debt factoring company and others who’ve successfully paid off credit cards can help you make wise decisions. At the same time, you shouldn't listen to everything you hear. Here are seven pieces of get out of debt advice you should ignore.
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1. Cancel Your Credit Card
When seeking get out of debt advice, some people may suggest canceling your credit cards. However, canceling a credit card with a high balance will not help your credit score. If anything, canceling a credit card might raise your total credit utilization ratio, and eventually shorten the length of your credit history. Both moves can lower your credit score. Therefore, keep credit card accounts open as you pay down balances. To avoid additional charges, cut your cards in half.
2. Settle Your Debt
Settling your debt for less than you owe is one way to get rid of balances quicker. But unfortunately, debt settlement has a negative impact on your credit score. The creditor will report the debt “settled for less than owed” on your credit report. And unfortunately, this negative entry might prevent you from getting new lines of credit in the near future.
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3. Walk Away
Whether it's a home or a car, walking away from a loan is never the solution. This will not only result in a foreclosure or repossession on your credit report, which stays for seven years, but the creditor may come after you for a deficiency judgment as well. For example, if your car lender repossesses and sells your car for less than you owed, you might be responsible for the difference. A better approach — notify your lenders of payment problems and see if there are provisions available for you.
4. Ignore Creditors
It doesn’t matter how much you ignore creditors, they will not go away. Even if they stop calling your house, they will send your account to a collection agency, and collection accounts stay on your credit report for up to seven years.
5. Use a Credit Counseling Agency
Companies can negotiate a lower interest rate on your behalf, thus helping you pay off your debt in about 5 to 7 years. However, third-party assistance will be reported on your credit report, which doesn't look good when you apply for new lines of credit. To other creditors, getting assistance says that you’re incapable of managing your own accounts.
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6. Consolidate
Consolidation with a loan or refinance can result in a lower interest rate and simplify your finances. However, only consolidate if you have control of your spending. Unfortunately, some people get a debt consolidation loan to pay off credit cards, and then re-accumulate balances on these cards within a few years, thus doubling their debt.
7. File Bankruptcy
A bankruptcy stays on your credit report for up to 10 years and can knock as much as 250 points off your credit score. Therefore, only file bankruptcy as a last resort — when there are no other options.
Debt is like a nagging headache, but there are ways to get out from under high balances. Develop a realistic debt elimination plan, reduce spending and work with your creditors. How did you win the battle against debt?
