by Ellen Carroll on April 22, 2009 (photo by Blush Response, available under a CC license)

401(k), Bankruptcy, Hope Now Alliance, National Association of Personal Financial Advisors, Oklahoma Unemployment Benefits, Saving Sense, Zombies!

Everyone’s heard the phrase, “desperate times call for desperate measures.” If you are, for example, being chased by zombies, then desperate times do call for desperate measures like, say, blowing up your car to distract them while you escape on a motorcycle with your sweet, squishy brain still intact. However, if your desperate time comes each month when you’re paying bills, you may be tempted to blow up your car, but don’t do it! With desperation so readily available these days, it may be easy to jump to the quickest possible solution to your financial woes, but very often that is a terrible mistake. I’ve listed a few of the more common mistakes people make when feeling the pressure to solve financial issues quickly, I hope they help!

1. Consolidating credit cards- Okay, so taking 12 credit cards with 12 monthly payments and turning that into one card with 1 monthly payment seems like a great idea, right? While one payment IS better than 12, its the interest rate that matters. If you are still only able to make the minimum payment, you aren’t really helping your debt situation. It will just be spread out over a longer period of time and with much more interest. The other major issue with credit consolidation is that your other credit cards (you know- the ones that got you in trouble in the first place..) are now free of charges and available for use. Many people who consolidate their credit cards end up spending again on the original cards and find themselves in TWICE as much trouble.

2. Taking out a home equity loan to pay off debts- For some people, this is a good option, but for lots of people this becomes an incredibly dangerous gamble. This might seem like a good idea, but you need to think about what you’re betting with (and against) before you jump in. If you’re using a home equity loan to pay off credit card debt, it’s just not worth it. The first reason is that you still have the same amount of debt. Secondly, if you can’t make the payments, you lose more than your credit rating. You lose your HOME. (Again, it makes the credit cards that got you into trouble available for use, which is dangerous. You may think, “I’ll just use them in case of emergencies,” but isn’t that what you told yourself when you GOT the card?) Before you risk your home, think about whether you’re actually helping yourself and how much you’re willing to risk.

3. Paying off the wrong debt. I know you already think I’m crazy because I put zombies in a financial column, but hear me out on this one. If you’ve got an overwhelming amount of debt, there is a right way and a wrong way to pay it off. You may be thinking that ANY debt that’s paid off is good (and you’re right, to a certain degree) but paying things off in the right order makes more sense. Here’s what you need to think about when paying off debt: What can be taken away from you? If you’re already behind and your credit score looks like it was run over by a caravan of semi-trucks, stop thinking about that number and think realistically. Here’s the truth: your credit rating is going to take a loooong time to repair so don’t get frantic about paying just anything off. Get caught up on things that involve collateral, like your house and car. Once you’re caught up, then you can start paying off credit cards and old debt. Pay off cards with the highest interest rate first, then those with lower interest. Then move on to old debt, like hospital bills and old phone or cable charges. Don’t give in to the first creditor that comes calling. Do what is best for you, not them.

4. Borrowing from your 401(k)- NOOOOOoooooooo! Don’t do it! 401(k)s are tricky enough without borrowing from them. Once you do, there’s a huge number of ‘if’s hanging in the air. Because the money in your 401(k) is full of wonderful pre-tax dollars, there are tons of restrictions. For example, if you leave your job before you pay back what you borrowed, the whole amount is then due. (You may be thinking you won’t leave your job anytime soon, but your company may have different plans. With lay-offs running rampant, its not a chance you want to take.) Also, if you can’t repay, you risk losing your job and being hit with major fees. It’s just not worth touching, if it can be avoided.

5. Not applying for unemployment- Losing your job is devestating, but if it happens, be prepared! Instead of risking more financial instability while you wait to see how long it takes to get a new job, apply immediately for unemployment benefits. It can take 2-3 weeks before you even see the first check, so waiting is just not an option. If you’re one of the fortunates that are able to land a new job quickly, good for you! You can cancel the unemployment and move on with your life. If, however, it takes longer than you expected to get a new job, you can count on having a little help. Using unemployment benefits may be hard to swallow, but put your pride aside and do what’s best for yourself and your family!

6. Filing bankruptcy- This is a touchy subject and as with all financial decisions, should be taken with extreme care and caution. There are two different types of Bankruptcy, Chapter 7 wipes out debt entirely and Chapter 13 which requires a repayment plan. Bankruptcy may seem like the only option, but there are several things you need to consider before applying. 1.) What are you going to lose? You will likely lose your car, your home and other posessions. You will definitely lose your credit score (and no matter how bad it is, ANYTHING is better than 0… when you apply for bankruptcy, the bottom drops out of your credit score, leaving it a dark, scary abyss..) 2.) Are you really getting relief? It may seem like the grass is greener on the debt-free side of the fence, but that simply isn’t the case. When your bankruptcy is accepted, you will have a hard time doing much with your life since your credit rating will be lifeless. Finding an apartment, or even a job may be impossible since most companies run credit reports prior to employment. Having no debt isn’t necessarily a fresh start, which many people find out the hard way. (Many people that file Chapter 7 Bankruptcy end up filing a second time 7 years later.)

So here’s the best advice I can give this week: Calm down and consider your options. Before jumping into any major decisions, weigh the cost with the outcome. Are you really doing yourself a favor or are you just prolonging the problem? Remember- new debt is not the answer to old debt. Until you fix the behavior that caused you to be in trouble, you will never be out. If your credit and debt are out of hand, seek counseling. I’ve listed a few handy contacts below that are reputable and ready to help you on your way to financial freedom.

Hope Now Alliance (for mortgage issues)
1-888-995-HOPE
hopenow.com

National Association of Personal Financial Advisors (for help with 401(k) and investments)
napfa.org

Unemployment Benefits
525-1500 (for OKC) or 1-800-554-1554 (outside OKC)
unemployment.state.ok.us

Oh, one more thing.. Watch out for zombies, they’ll sneak up on you.

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