The 4 worst types of debt and what you can do to get rid of it


All debts are not the same. Some debts, like car and mortgage payments, can actually improve your credit score, as long as you can keep up with the monthly payments. But there are other types of debt that only make your financial situation worse. Here’s a closer look at four of the worst types of debt and what you can do to get rid of them once and for all.

1. Debt on which you have defaulted

When you default on a debt, your lender reports this information to the credit bureaus, and this can lower your credit score, especially if the default occurs as a result of numerous late payments. You may start to get calls from a collection agency, and worse yet, the default will stay on your credit report for seven years, making it difficult to get new loans and lines of credit. Your lender may also add additional late fees to your balance.

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Ideally, you can put an end to this situation before it starts by contacting your creditor as soon as you start having difficulty making payments. The company may be willing to work with you to set up a payment plan so that you can avoid default. Even if you’ve already failed, it’s still a good idea to reach out. See if you can come up with some sort of payment plan or settlement agreement. For lenders, settling a loan might not look as good as paying off the balance in full, but it’s better than continuing to take on debt. If you are unlucky to negotiate on your own, consider using a reputable credit counseling service.

You will also want to start taking steps to rebuild your credit. Consider signing up for a secure credit card, and make at least the minimum payment on all of your other bills to avoid further late payment penalties and overdue loans.

2. Credit card or payday loan debt

The average credit card interest rate is around 17%. If you don’t have a month-to-month balance, you don’t have to worry about paying interest. But if you carry a scale, it can get expensive quickly. If you load $ 1,000 on your card but can only afford to pay $ 50 at the end of the month, it will take you two years to pay off, and you will end up paying an additional $ 200 in interest, assuming a 17% interest. rate.

Payday loans are even worse. The average interest rate for payday loans is 391%, assuming you factor in the various fees and charges that most payday lenders charge as part of the interest expense on getting the loan. If you borrow $ 500 at this rate and pay it back over a year, you will spend $ 2,024, including $ 1,524 in interest. If money is tight on you, it can be difficult to break out of this cycle once you get into it.

Defaulting will only make your situation worse, so you need to find a way to get a more affordable interest rate. Your credit card lender may be willing to negotiate a lower interest rate, but another option is to transfer a balance to a new credit card with a Launch APR 0%. This is usually only a good idea if you feel like you can pay off the full balance during this introductory period. Otherwise, you will find yourself in the same position as before. Also keep in mind that there may be fees associated with transferring a balance.

A Personal loan is also worth considering. Depending on your credit score, the interest rate may be more affordable than that of your credit cards. Even if you don’t, the upside is that you’re stuck on a single, predictable monthly payment instead of your balance continuing to accumulate interest. This could solve your problems, as long as you don’t go out and accumulate more credit card debt.

3. Tax debt

Most creditors aren’t allowed to foreclose on your retirement accounts to collect what you owe them, but the IRS is an exception. If you owe tax arrears and have made no effort to put a payment plan in place, expect the government to come to you with everything it has. He can also place a lien on your property or revoke your passport. However, withdrawing money from needs-based retirement benefits, such as Supplemental Security Income, is not permitted.

If you end up with taxes that you can’t pay, the worst thing you can do is not file or pay at all. Instead, file your tax return as usual and file an extension if you need more time to pay. The government will give you an additional six months, but you will have to pay a 0.5% penalty on any outstanding balance.

You can also try asking for a payment plan if you owe $ 50,000 or less. Some people may benefit from an offer in compromise, which allows them to pay their taxes for less than the full amount. You can find out if you are eligible by completing the Prequalification form on the IRS website.

4. Student loan debt

Many young adults graduate from college and then struggle to pay their living expenses and student loans at the same time. If you fall behind on your student loan payments, you incur more penalties, and the real plus is that you can’t even get rid of them by filing for bankruptcy. But there are still ways to get out of student loan debt.

You may be eligible for a student loan forgiveness, depending on what you do for a living. If you work for the government or a nonprofit organization for a number of years, your student loan debt may be reduced or eliminated entirely, although you will need to continue making payments during that time.

If your credit is good, you can also refinance your loan for a more affordable monthly payment. You can also try switching to an income based payment plan. These plans usually have longer terms and limit your bill to a fixed percentage of your monthly income.

Make debt free your goal

Dealing with these four types of debt is difficult, but if you commit to debt relief, you can. By following the suggestions listed above and making a commitment to manage your money responsibly, you’ll be on the right track.

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