Smart SpendingSmart Spending

The worst (and best) ways to attack big debts

If you're dealing with your bills the wrong way, you're compounding the problem. Here are common tactics that fail, plus advice on what to do instead.

By MSN Money Partner Aug 23, 2013 12:12PM

This post comes from Angela Brandt at partner site Money Talks News. 

MTN logoMultiple credit card bills each month, with balances that are growing, not shrinking. Student loans. Plus a car payment. Do you feel buried by a mountain of debt?

There are smart ways to dig your way out. Pick the wrong way and you'll make a bad situation much worse, adding years and thousands of dollars to your burden.

Let's examine the wrong ways to pay off debt and then explore how to get the job done right.


Do you have a debt problem?

First, let's look at some telltale signs that your debt is getting the best of you. Do you:

  • Choose to pay some bills and not pay others because there's not enough money in your account?
  • Max out your credit cards, even though you know that's damaging your credit scores (and making you feel ill when you get the bills)?
  • Keep using your credit cards even though you swore you'd leave them in the sock drawer?

Do any of these sound familiar? Then you need to take some steps to pay down that debt. Here are the worst possible strategies:

Making minimum payments

While paying the minimum payment each month will keep the card companies happy, it's a counterproductive way to pay off debt. Do you need proof? Check the little chart on your next credit card bill. The Credit CARD Act of 2009 requires credit card companies to show how long it would take you to pay off your debt by paying only the minimum.

Bankrate provided an 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.

Pillaging your retirement plan

The money in your retirement savings may be a tempting fix for your current financial woes, but you'll be shortchanging yourself in the long run. Take the money out and it's no longer being invested and growing for your retirement. And, other than a few limited circumstances, withdrawing the money early means you'll pay not only taxes on it but also a 10% penalty.

Past Due Notice on Envelope © Stockbyte/Getty ImagesIf you borrow from your 401k at work, you may be charged hefty fees, and you must repay the loan plus interest within five years. If you quit or lose your job, you’ll have to pay the money back right away.

It could also hurt in other ways. Jeanne Thompson, vice president at Fidelity Investments, told USA Today that many who've borrowed from their 401k had to reduce their contributions to their retirement so they could afford to pay it back. On average, it took them two years to get back to their initial contribution rate. That's not the way to save for your golden years.

Other bad ideas

As you can see, it usually makes no sense to pay off debt with borrowed money -- particularly loans that carry exorbitant interest rates and fees. Among them:

  • Cash advances from credit cards. You'll pay a fee of 3% to 5%, plus an interest rate that's higher than the rate for using your card. There's no grace period, so the interest begins to accumulate right away.
  • Bank direct deposit advances. Your bank may be willing to offer you a loan that will be repaid when your next paycheck is direct deposited. Huge drawback: The Center for Responsible Lending says  the average bank direct deposit advance carries an annual interest rate of 365%.
  • Payday loans. Each year 12 million Americans use payday loans, according to a Pew Charitable Trusts report. The vast majority of borrowers are using payday loans to cover expenses like rent, food and credit card bills. And it costs them dearly. Pew says the average borrower takes out eight loans of $375 each per year and pays $520 in interest.
  • Title loans. You'll pay fees and a high interest rate — and lose your car if you can't pay the money back.

What about debt settlement?

Using a debt settlement company can mean paying a huge fee to a company to do what you can do yourself: Ask your creditors to settle the debt for less than you owe. Also, as Money Talks News founder Stacy Johnson said:

The debt settlement industry, unlike the credit counseling industry, is largely unregulated. That means there are more than a few bad apples. Some agencies take major fees up front before they even begin to settle your debt. Some have been charged with flat-out stealing people's money.

How to do it right

One of the most effective ways to destroy debt is called the debt snowball. Let's apply it to credit card debt in our example. Basically it works like this:

  • Make a list of all of your debts. You can order them from smallest to largest or from highest interest rate to lowest rate. Paying off the credit card bill with the highest interest rate first is the smartest way from a purely financial point of view. But paying off the smallest debt first may give you the confidence boost you need. Think how good you'll feel when you cross that first debt off your list.
  • While you continue to pay the minimum due on your other credit card bills, throw every extra cent you have at the first debt on your list. Where can you find extra money?
  • Review your spending plan (if you don't have one, it's essential you create one now) and reduce your discretionary spending. Brown-bag your lunch more often. Ditch the cable TV. (You can do so and still enjoy the TV shows you love.) Switch to generic brands at the grocery store.
  • Sell stuff. There are plenty of ways to turn your unwanted possessions into cash: Sell on eBay, piggyback on a neighbor's garage sale, take your items to a consignment shop.
  • Make more money. Are you long overdue for a raise? Can you find a part-time job? Websites like Fiverr, TaskRabbit and Zaarly can connect you with people who are willing to pay for your help with a wide variety of tasks.
  • Once the first bill on your list is paid off, apply the money you used to make those payments to the next credit card debt on your list.
  • Repeat the process until your debt is gone.

What if your debt has spiraled out of control and the collection companies won't stop calling? Your best bet may be a reputable credit counseling agency. This can work if you have income. If not, bankruptcy is worth a look.

As Stacy has advised before, "If you don't have enough income left after eating and putting a roof over your head to make even minimum payments on your debts, it's time to talk to a lawyer."

What have you done to destroy debt?

Karen Datko contributed to this report.

More on Money Talks News:

Aug 23, 2013 1:44PM
As far as cashing in a retirement plan to pay off debt, it's not necessarily a bad idea.  You have to run the numbers, but if you think you're only going to make 5%/yr on your 401k over the next decade (that's been about the return over the last 10 years), then using it to pay off a CC balance of $20k at 28% very well might be a good play.

If you truly want to get out of debt, cut WAY back on your expenses.  Get rid of the smartphone and data plan.  Stop eating out and learn to like rice and beans and canned vegetables.  Move if you have to.  Get rid of your mid-priced car and get a fuel-efficient beater.  Stop paying for TV.  Instead of Netflix, get free movies from the library.  Yeah, all this is easier said than done, but it is possible, it all comes down to how motivated you are.  Debt=slavery.  As long as you owe, you'll never be truly free.


if you really want to get out of debt, you can do it.  it can be very depressing looking at the big picture, but little bites work best.


American people really need to seriously look at what is a need and what is a want and what it takes to really live.  Food, shelter and clothing.  When I say those three I do not mean steak, mansion and designer clothes.


I have had to be frugal all of my life and now I get to enjoy the fruits of my frugality.


Aug 23, 2013 2:26PM

I have never had a ton of credit card debt, but I have struggled with other bills (notably student loans) and having to live alone while barely making ends meet.  For me the biggest thing was the learn where the extra money was going, did I eat Subway more often than I should?  Did I rent a bunch of movies instead of watching Netflix?  Was I paying too much for cable? 


The second change for me was switching careers.  I finished my degree in 2008 after I lost my previous job and then worked a retail job for almost 3 years during the recession while I looked for a position where I could use my degree.  In 2010 I finally obtained a better job and a significant pay raise, I started saving for retirement, saving for emergencies, saving for big purchases and paying extra on all my loans.  I quickly paid off several of my student loans and have "snowballed" that amount into my current payments to eliminate debt faster.


You really have to stick with it, don't break down and buy things you can't afford.  Watch the debt get smaller and think of how much extra money you'll have once the debt is gone and you can put that money to better use!

Aug 23, 2013 7:12PM
Payday loans and title loan companies are the worst of the worst!!! Sell something, get a part-time job, don't eat like a king, but like a peasant,  BUT NEVER GO TO THOSE THIEVES!
Aug 23, 2013 4:28PM
I did the debt snowball and it became a game to see how fast I could knock down the balance of the first debt as much as possible before moving to the next one.  I listen to Dave Ramsey to stay motivated too.
Aug 26, 2013 11:09AM

Yup - that was me!  Since they say paying off revolving debt ups your credit score faster, I would put down $500 toward a CC, then a birthday or baby shower would come around, or I would have to buy clothes for a change in seasons, or the car needed a repair, and that money would be gone.  Now I have a $500 cushion, and slam down my loans.  Once a loan is paid off its gone, revolving lines of credit are a b!tch.  The diference is only about 20 pts between paying down a CC and a loan - but the freedom in your budget to eliminate $100, $200 or more in a loan, so that it can snowball to the next bill, is priceless.

Aug 23, 2013 6:31PM
Maybe someone should send this video to the President.
Aug 23, 2013 6:03PM
No secrets there get another job yeah how about advice if you don't have a job talk about the obvious there was no ground breaking information here. 
Aug 23, 2013 4:32PM

Living Dept free is the best feeling in the world, and I think it is worth every penny!!!

In my opinion, if you have money on your 401K that try to cash it out to pay off dept. most of the time you will not be able to cash out unless you get fired or quit.

401K does not grow as fast as everyone is saying, and taxes go up fast.

Another reason is you do not know what will happen in 10 or 20 years. yore best bet is to have saved money on a side so that when you really needed you can just grab it, you can not do that with 401K.

Or don't touch your 401k, and pay interest most of you live to pay off dept, always worrying to make sure you will have plenty for bills. Then your retirement egg will grow and if you get to live that long and you will not get ill, you might enjoyed a little, but will that satisfy you for the lost time.


Aug 23, 2013 3:09PM
Do what I did...punted it back to the
Aug 23, 2013 3:21PM
Bankruptcy is the only option for you. I guess we have to face the facts, if you have worked all of your life supporting your children and supporting the welfare, homeless, food stamp program, and the unemployed, I guess we don't have many options do we?
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.