Financial Pitfalls Commonly Fallen In To

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Financial Pitfalls Commonly Fallen In To

Many families are living on very tight budgets today. Rising interest rates on credit card debts coupled with the rising cost of gas and groceries, limited employment opportunities and more are all contributing to the financial stress many families feel. Some families are making an effort to reduce their monthly payments and ease their budget constraints. However, some of the methods they are using may actually be setting them farther behind financially. Here are some of the most common money traps you should avoid:

Consolidating Your Debts Through a Consolidation Program 

In some cases, consolidating your debts makes sense. For instance, if you consolidate high interest credit card debt into a lower interest rate personal loan with a fixed term. This may lower your interest charges, increase the amount of principal paid off over time and provide you with a finite period of time when your debts will be paid off. However, some consumers opt to consolidate debts through a consolidation program offered by a third party. These programs charge a high fee for something you could do on your own.

Refinancing Your Home Mortgage 

Mortgage interest rates are close to historic lows. Some homeowners are refinancing their home mortgage to take advantage of these lower rates and reduce their monthly payment. Some are pulling equity out of their home with a cash-out refinance, and they may use this equity to pay off debts, pay for repairs on their home and more. However, in order to keep payments low, many are refinancing with a 30 year mortgage.

There are reasons why you should think twice before doing this yourself. For one, you will be extending the amount of time it takes you to pay off your mortgage. Further, during this extended time, you will pay more money in interest charges. You should also consider that these downsides are coupled with the fees associated with refinancing your mortgage, including underwriting fees, an appraisal fee and more.

Taking a Loan Against Your 401(k) 

Many savvy investors are aware that they can borrow against their 401(k) retirement account. By borrowing these funds and paying them back over time, you can avoid paying taxes and penalties that would be due if you simply withdraw the funds. However, any funds borrowed from this account will not grow in value while withdrawn from your account. Further, a 401(k) loan allows you to borrow money that is already yours, yet you have to pay interest in order to access it. This ultimately decreases the value of your retirement assets.

Further, some of these programs involve debt settlement, which has a negative effect on your credit scores. One other factor to consider is that debt consolidation creates a situation where credit card balances are transferred to a new debt account, and the credit card balances are zeroed out. Some consumers are tempted to charge those balances back up, which can create an even greater debt situation than they were in before.

In many cases, a better option to ease a tight budget is to make smart reductions in your family’s spending habits. A prepaid debit card can be used to prevent overspending. This can ease your budget without affecting your assets or credit rating.

Disclosure of Material Connection: This is a “sponsored post.” The company who sponsored it compensated me via a cash payment, gift, or something else of value to write it. Regardless, I only recommend products or services I use personally and believe will be good for my readers. I am disclosing this in accordance with the Federal Trade Commission’s  “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”