Unfortunately, many people who would like to eliminate their debt shoot themselves in the foot by making bone-headed mistakes that actually compound their debt problems.
Here are the four dumbest things you can do if you're already deep in debt:
1. Keep spending recklessly.
You'd be surprised at the number of people with credit card bills up to their eyeballs who nevertheless keep on spending carelessly. Some are shopaholics who need help ending their shopping addictions. Others need to learn to budget – or haven't even bothered trying.And a big group of consumers in debt have basically given up mentally when it comes to adjusting their spending habits. They already have $5,000, $10,000, maybe even $20,000 or more in credit card debt. So when they see something they want to buy, have or do, they think, "I'm already in debt, so what's 'X' more dollars?"
But that's the wrong mindset. If you're in debt because of your spending ways, you've got to get that spending under control if you're ever going to become debt-free. (Read my tips on creating the right mindset to become debt-free).
Also, check out the free online version of my book, Zero Debt, to learn how I paid off $100,000 in credit card debt in just three years. Needless to say, to eliminate my debt, I had to get my own reckless spending under control.
2. Use a home equity loan to "fix" a deeper debt problem.
So you've got a house with some equity in it and you're thinking about using a home equity loan or home equity line of credit to pay off your mounting credit card debt, huh? Maybe you should re-think that strategy.
On the surface, it may seem like a smart move to get rid of credit card debt with a high interest rate in favor of lower-rate mortgage debt. In reality, though, this is often a terrible idea.
When over-spenders or poor money managers take out home equity loans, it does make their credit card bills go away – but only temporarily. Then the lure of credit cards with zero balances proves to be all-too-tempting, and those chronic spenders go right back out there and charge up more credit card debt. The home equity loan hasn't fixed the underlying issue, which is a general mishandling of one's finances; it only served as a band-aid to cover up the deeper problem.
Even if your spending habits aren't the problem, taking out a bigger mortgage to reduce your credit card debt could still be ill-advised if the issue that got you into debt hasn't been resolved.
Many people get into debt because of what I call "The Dreaded Ds" – downsizing, divorce, death (i.e., a main breadwinner in the family died), disability or disease. If you were driven into debt because of one of these circumstances and the issue hasn't yet been rectified – say, you were downsized and still don't have a job, or you faced a disease or disability and haven't yet bounced back from your medical problems – then tapping the equity in your home to pay off your credit card debt may wind up exacerbating your financial troubles.
Unfortunately, there are many heart-breaking stories of people who paid off their credit card debts by converting those obligations into mortgage debt – only to continue experiencing financial hardship. So they were forced to use the credit cards yet again to stay afloat and also had to pay bigger mortgages. For those who can't keep up with all the new payments, many wind up in foreclosure.
3. Borrow money haphazardly from family members.
We've all heard the phrase "Desperate times call for desperate measures." And when people are desperate for cash, they'll do anything – even borrow money from relatives despite the huge risks involved.
Getting a loan from a family member – or even a close friend – is always a dicey proposition at best. But when you're already in debt and are borrowing to repay another obligation, you're just begging for trouble.
The worst times to borrow from a relative? When you have no definitive income source to repay a loan; when you have no specific date you know you can expect to get your hands on future cash; or when a family member agrees to float you some money and says, "OK, but I really need the money back soon to pay my own bills."
Without a specific game plan on exactly how and when you'll repay the loan, you're setting yourself up for a major relationship rift if you don't keep up your end of the bargain. And it's such a shame when family squabbles erupt or relationships deteriorate over money issues. (Read these tips on how to establish proper financial boundaries with relatives and friends).
4. Ignore the warning signs of debt.
Some people in debt are living in a fantasyland when it comes to the potential dire implications of their debt or how severe their debt problems may already really be. In many cases, those who pay their bills on time or who have good credit ratings may be in denial about their debt levels – or about how that debt may impact other areas of their lives. As long as they're making minimum payments and bill collectors aren't calling, they think they're doing OK.
But those with debt may ignore how that debt may be causing them to argue with their spouse about money, or how the debt gives them a gnawing feeling in their pit of their stomach when they have to open their credit card bills.
In reality, whenever you owe a creditor money of any kind – whether it's small debts or large ones – you should be alert to the warning signs that you have too much debt. Some of those signs: You can only afford minimum payments, you constantly use credit card balance transfers to keep up with your debts, and you're maxed out on one or more credit cards.
If you fail to heed the red flags that you might have too much debt, it's easy for your debt to quickly spiral out of control when unexpected setbacks happen or your life circumstances change.