You find yourself deep in debt.
Most likely credit card debt.
You borrow money, from a bank, from your family, or from friends to pay it off and get out of debt.
But was this a wise move? Here is Why It's Not a Good Idea to Borrow Money to Erase Debt.
Scenario 1 - You Borrow From Family and Friends Many times it does not even start off with you asking.
Your parents, a sister, a grandparent, a friend, discovers that you are struggling with debt.
And they offer to loan you money to pay off a credit card or two.
Or maybe even all of your credit card debt.
The conversation with your benefactor probably even ended with them saying, "Don't worry about it.
Pay me back whenever you can.
" Scenario 2 - You Borrow From The Bank The conversation with your bank probably starts off with refinancing your home.
New, lower interest rates become available and you want to take advantage of them.
The bank representative checks over your credit scores and raves about how good you are with money because of your excellent credit scores.
He then offers you advice and says, "You know, you have a lot of equity in your house.
Why not take some of that equity and pay off your credit cards, your car loan, and maybe your school debt.
It won't cost you much more in monthly payments to do so.
And it will get you completely out of consumer debt.
" And you say that it is a great idea and sign the papers.
Which of these scenarios is financially the wrong one? The answer is - both of them.
Neither scenario is a financially sound decision.
And neither is the proper way to erase debt.
Let's take borrowing from family and friends.
It seems like a good idea.
A no interest loan from people you know and love.
But in most cases, these types of loans never get paid back.
As a result it causes hurt feelings on both sides.
Your loved ones expect to get paid back.
Don't you remember? They called it a loan.
Not a gift.
You as the borrower will feel guilty because you can not pay it back.
And what will happen is it will put a strain on your relationship with them and probably cause you to avoid them and they don't really want to talk or hang out with you either because of it.
In addition, you haven't really paid off the debt.
You have just moved it to another creditor - your family and friends.
As for borrowing from the bank, or in the above example, against your home equity, this is equally a bad idea.
It may feel like you have "paid off" the debt.
But actually all you have managed to do is move the debt around like in the above example.
And if it was credit card debt, which is unsecured debt, meaning there's no collateral backing the debt, hence they can't come after your belongings to collect on it, rolling it all into your mortgage has now secured that debt to your house.
If you can't afford the extra on your mortgage payment, you have now put your house at risk.
All for credit card debt.
In both scenarios, you also have not learned anything.
You have not figured out why you got into such a mess.
You have not learned how to correct your behavior to avoid debt in the future.
You have not actually paid off any debt.
All you have managed to do is just move it around and thought you were brilliant for doing so.
In 95% of these two scenarios, the person who was in debt, moved the debt from credit cards to a mortgage, home equity, or loan from family and friends, finds themselves right back in the same amount of credit card debt again within 2 to 5 years.
All because you have not changed your financial behaviors.
What You Should Do 1.
Never borrow from anyone to erase debt.
2.
Come Up With a Plan - to figure out why you are in debt and most importantly how you will get out.
3.
Create a Budget.
4.
Use the Debt Snowball Method to pay it off.
5.
Build an Emergency Fund.
6.
And Never Go Into Debt Again.