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6 risky ways to pay off credit card debt

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The best way to pay off credit card debt
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Find the best way to pay off credit card debt © manfeiyang/

The best way to pay off credit card debt

You just couldn't resist that clearance sale or airfare deal, and now the thrill of scoring a few bargain purchases is quickly turning into anxiety as your credit card debt mounts.

What's the best way to get out of the red? You could forgo little luxuries -- such as dumping your cable in favor of online programming or bagging lunch instead of dining out -- and direct the extra cash to cut the debt.

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You also could pay more than the minimum payment each month, and attack the credit card balance with the highest interest rate first. After several months of sacrifice, the credit card debt would be conquered, and life would resume as before.

But as with losing weight, there are shortcuts you don't want to take to pay off credit card debt. Bankrate outlines 6 of them.

  1. Paying just the minimum
  2. Taking money from retirement accounts
  3. Robbing emergency savings
  4. Tapping home equity
  5. Skipping the mortgage payment
  6. Taking out another loan
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Mistake No. 1: Paying just the minimum © Bacho/

No. 1: Paying just the minimum

If you want to get out of credit card debt, paying the minimum each month is the slowest way to get there. It's also incredibly expensive.

For example, say you have $5,000 in debt on one credit card. Your interest rate is 15%, and your minimum payment is calculated by adding interest to 1% 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.

You could get a debt consolidation loan with a fixed monthly payment at rates that are usually lower than average credit card rates.

SEARCH RATES: Check current rates and see estimated payments on Bankrate today.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009, or Credit CARD Act, makes the consequences of just paying the minimum each month a little more obvious. "The credit card bill must include a chart that shows if you only pay the minimum, it will take X number of years, and you will pay X amount of dollars," says Mary Ellen Nicol, a former counselor at the nonprofit credit counseling organization CredAbility (now Clearpoint) in Atlanta. "It's a good place to start."

Mistake No. 2: Taking money from retirement accounts | JGI/Jamie Grill/Blend Images/Getty Images

No. 2: Taking money from retirement accounts

"Do not go into retirement savings for credit card debt," says Nicol. "It's too expensive."

Besides raiding your future financial security, Nicol says you could owe taxes to the IRS if you withdraw tax-deferred money from certain retirement accounts. Additionally, you may incur a 10% penalty if you take out funds too early.

Instead, consider temporarily stopping contributions to your retirement account and use that additional money to pay off your credit card, says John Ulzheimer, president of The Ulzheimer Group and an expert on credit. The interest you're paying each month as balances roll from one month to the next is outpacing the returns you're earning from your monthly contributions, he explains. Just remember to restart your contributions as soon as you clear your credit card debt.

Mistake No. 3: Robbing emergency savings © GaudiLab/

No. 3: Robbing emergency savings

Remember that rainy-day fund? Fight the temptation to put that cash to use.

"Losing your job is an emergency. Paying off your credit card is not," says Ulzheimer. "It's a financial burden to carry debt."

Draining your emergency fund to pay off credit card debt only exposes you and your family if a real emergency strikes. You could be vulnerable for a year or longer as you replenish the savings. What constitutes a real emergency? A medical issue, a natural disaster or a job loss, especially with unemployment lasting longer these days, says Nicol.

Ulzheimer says if you feel compelled to use those funds, don't wipe them out. Use a small portion along with other available cash as a stopgap for your credit card debt.

Mistake No. 4: Tapping home equity © d8nn/

No. 4: Tapping home equity

There's some debate as to whether pulling equity out of your house to pay off credit card debt is a good idea. Ulzheimer points out that many homeowners have traditionally tapped home equity to help pay for other debt such as credit cards. However, some homeowners may not even have that option because home prices have yet to rebound in their area.

About 4 million homes, or 8% of all residential properties with a mortgage, were in negative equity during the 1st quarter of 2016, according to CoreLogic, a provider of property information and analytics. Negative equity means the homeowner owes more on the property than it is worth.

"Put a check in the 'careful' column," says Ulzheimer. "If you have equity, you don't want to push yourself too close to 100% loan-to-value. You're endangering your home."

Nicol agrees taking out home equity is a dangerous move. The equity that remains in your house is your buffer against default and foreclosure.

"I wouldn't even use it to pay off a second mortgage," says Nicol.

RATE SEARCH: A personal loan can be a viable alternative to tapping home equity to pay off debt. Check loan rates and estimate your monthly payments on Bankrate.

Mistake No. 5: Skipping the mortgage payment | Tom Grill/Photographer’s Choice RF/Getty Images

No. 5: Skipping the mortgage payment

In a similar fashion, paying the credit card bill instead of the mortgage payment is also a huge risk and a big no-no, says Nicol.

"That opens the door to foreclosure," she says.

Sadly, this strategy became more common after an unprecedented drop in home prices put more homeowners on the brink of losing their homes, says Barrett Burns, president and CEO of VantageScore Solutions, the company behind the credit-scoring model VantageScore.

It is all too common for families to depend on credit cards as lifelines to pay for the basics and get overextended. It's OK to use credit cards in this way, as long as you can make the payments and keep those credit lines open, Burns says. It becomes a problem when keeping the lines open means missing a mortgage payment.

Credit card issuers are quick to shut down delinquent credit lines because they are unsecured debt. The road to foreclosure, by contrast, is much longer, and many homeowners recognize they could have as long as a year before they are evicted. Still, a house is most Americans' largest asset, and jeopardizing it to save a credit card could come back to haunt you.

Mistake No. 6: Taking out another loan | PhotoAlto/Eric Audras/PhotoAlto Agency RF Collections/Getty Images

No. 6: Taking out another loan

Avoid payday loans at all costs, says Ulzheimer. Nicol also says title loans, or loans against a car, are usually too costly to pay for overspending.

However, both recommend considering a signature loan, or unsecured personal loan, from a bank or credit union.

You'll want to make sure you can qualify for this type of loan at a reasonable rate and an affordable minimum payment. Sometimes the rate is better than a credit card; sometimes it's not. And be ready to give proof that you have the income to pay back the loan.

The drawback? These loans typically come in small amounts, from $1,000 to $35,000. So, if your credit card debt is huge, a signature loan may not cover all your debt consolidation needs.

RATE SEARCH: Check current personal loan rates and example payments.


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