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Money problems? Struggling with credit card debt? What you need to know about bankruptcy? Trouble repaying student loans?
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Getting out of debt is all the rage. It's easy to fall into and hard to escape, but many millions of us are working on it. Here, then, are a few myths to be aware of in the pursuit of financial freedom.
Myth 1: Cancel your credit cards. By all means, pay off your credit card balance (or balances). If your credit cards have the sweet lure of the Muses and sing to you from your wallet, remove them. Cut them up, freeze them in baggies of water, or seal them in an envelope and give them to your mother. But please, please don't cancel a credit card that is still carrying a balance. If you do, the credit card company you owe money to will very likely consider you a high-risk account, and promptly raise your interest rate. The way they see it, if you cancel your card, you're on the brink of ruin. If you're in the process of repaying your debt, this is not the impression you want to make, especially if it's untrue. A better bet is to stop using the card, pay your bill on time for at least six months, and contact the customer service department directly. Ask them to reduce your interest rate; creditors can be refreshingly flexible and cooperative when they recognize a reliable customer. If you consistently pay more than the minimum and stop adding to the unpaid balance, you will get it paid off eventually. Then you can cancel the card. Or you can leave it in pieces, on ice in your mother's freezer.
Myth 2: Use a credit counselor. Everything has its place, and credit counseling is no exception. If your finances have deteriorated to the point of filing bankruptcy or committing a felony, then it is time to see a credit counselor. These good people can be very helpful in communicating with your creditors, organizing a personal budget, and creating a plan to get out of debt. But be aware that going into credit counseling is destructive to your credit. In a nutshell, like canceling unpaid credit cards, using credit counseling is interpreted by loan calculators as being in financial trouble. If you are in financial trouble, it may be the way to go; but if you can still juggle your own bills, keep juggling. Also consider the fact that a "short-term" plan to get out of debt usually means several years, and during that time, you will be required by contract to hand over every cent you make, aside from a predetermined personal budget. No more trips to the hairdresser or new ratchet sets. This does do wonders for knocking off debt, but it can get tough over time. Belt-tightening has a whole new meaning when you don't have the money to buy another belt.
Myth 3: Consolidate your loans. Yes, there is a time when loan consolidation is a good choice: namely, when it's going to save you money. Putting all of your outstanding debt onto a low-interest credit card or home equity loan may be easier, but not necessarily cheaper. Often those low interest rates creep up after a period of time. Compare what you are paying to what you will be paying if you don't get the loan paid before the interest goes up. Will you save money? There are lots of people who are invested in making it look like signing your debt over to them will solve all of your problems. And they may be right. Just make sure. And of course, it goes without saying that before you've gone to all the trouble of consolidating your debt, you've run your credit cards through the blender.
Finally, it must be said that despite all the gimmicks and angles being offered these days, there's really only one way out of debt. Stop borrowing, and start paying. For many of us looking for a simpler way of life, this is a great place to start.
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