Debt is really easy to get into, not so easy to get out of. Many people feel trapped by the amount of debt they have and are just not sure how to get off the hamster wheel.
While some debt may be pretty unavoidable, like a mortgage, there are so many debt traps you should avoid because they are really awful. Heed my words, friends, you WILL regret falling into any of these traps.
Debt Trap #1 — Co-signing a loan. No, just no. Do you know why people need co-signers? Because they don’t have credit or have bad credit. The credit industry hands out money like candy and even it isn’t interested in loaning to these people. It is almost always a bad idea to co-sign for anyone.
So what does co-signing mean? It means when if they don’t pay, you pay. If they don’t pay and you don’t pay, your credit gets screwed up. So does theirs, but what do they care? Their credit already sucks.
How to avoid it — Nicely explain to the person asking you to co-sign that you do not co-sign for anyone. Make sure you adhere to this rule with everyone if you are going to use that as your excuse. Or you know, just say no. You don’t really have to explain if you choose not to put your credit on the line for someone else.
If you DO decide to co-sign, be prepared to pay the loan. Then, it will just be a nice surprise if you don’t have to!
Related: 6 Steps to Get Out of Debt
Debt Trap #2 — Living off student loans. Say it with me, “student loans are not the same thing as income!”. It is incredibly tempting to party like a rockstar when your 18-year-old self gets handed thousands of dollars. It’s no big deal, right? After all you don’t have to pay them off for four whole years!
Guess what, guys? Those four years fly by! Your 22- or 23-year-old self is going to hate you if you take out extra loans. How do I know? I DID THIS. And my 24-year-old self is less than thrilled, let me tell you. My 18-year-old self lived like a baller and I don’t have any furniture.
How to avoid it — I’ve got a crazy idea for you. Take out only what you NEED (the new iPad 16 or whatever is not a NEED) and get a job to pay your bills. Yes, you can pay your bills with a part-time job in college. And yes, you can easily balance full-time school with part-time work. People do both full-time while raising kids, stop complaining!
Debt Trap #3 — Withdrawing money from your 401(k) early. DO NOT DO THIS. First of all, that money is for retirement so don’t even think about doing an early withdrawal. Your 65-year-old self will be cursing your 20-something-self while eating Alpo and working to death (literally!). Leave that money alone unless you are in a serious crisis. ALL OTHER OPTIONS should be exhausted before you dip into your retirement account. Early withdrawal means a great big tax bill and lots of penalties.
Second of all, if you actually just “borrow” the money, do you understand the money you are losing by borrowing from those funds? You are missing out on time, meaning you are missing out on growth. Not to mention, if you leave your job, you only have 60 days to repay the loan before it is considered an early withdrawal. See “first of all”.
How to avoid it — Um, just don’t do it. It’s a freaking terrible idea and you will likely regret it.
Debt Trap #4 — Buying too much house. The bank is going to entice you with a huge mortgage loan approval. Hate to break it to you, but you likely can’t afford what they are approving you for. Try reducing that amount by a third (or even a half) and then it will be a little more realistic.
Also, how much space do you actually need? Are you part of the Gosselin family? Your family of 4 probably doesn’t need 4,000 square feet. Imagine how much cleaning you’ll have to do…
How to avoid it — Be realistic about how much space you need and how much house you can afford. Your home should be a place that makes you feel happy and safe, not a place that stresses you out financially and emotionally each month. Find a reasonably priced home with a reasonable amount of space that you love.
Debt Trap #5 — Payday loans. The hatred I have for payday loans is only matched by my hatred of raccoons. (I really HATE raccoons.) Payday loans are the biggest rip-off ever. Like the lottery, they are basically just keeping poor people poor.
Payday loans do not take the place of emergency funds. Low-income people are targeted for this predatory lending product with annual interest rates in the three figures. Yeah, THREE figures! Payday loans are meant to keep consumers in a debt trap forever, constantly needing to borrow more to get current on bills and pay the outrageous interest rates they are accruing.
How to avoid it — This is why an emergency fund is crucial — you NEED money put away for a rainy day to avoid running up debt. Put as much as you can away per week until you build up an emergency fund that will get you through any possible non-medical emergencies. Also, use any other debt option before a payday loan.
If it sounds too good to be true, it probably is. Don’t fall into any of these debt traps because I promise you, they suck.
Have you fallen into any of these debt traps? What do you think the biggest debt scam is?