by Joseph Kenny | 01/3/09

Paying down debt is something most people try to do when it comes to their finances. However, the effort hardly comes without challenge. Paying debt involves more than just spending money on bills; it's about carefully managing your finances so that you achieve a sensible budget that reflects your needs while putting enough on the side to tackle the debts you've accrued. More than that, it's about utilizing your income in a way that allows you to achieve this without turning to other forms of compensation. Unfortunately, not everybody does it this way, and they often end up using methods that are suboptimal or even counterproductive.

Credit card debt is an issue that a large number of Americans are dealing with today. Some people are just trying to handle a small balance, while others are completely swamped in a debt quagmire that is seemingly impossible to get out of. While it is true that the issue of getting out of debt is something that isn't always easy, it doesn't have to be frustrating or complicated. Getting rid of debt and especially credit card debt can be simplified. Towards that end, there are several ways of handling debt you should avoid when making the effort to combat debt.

The first and most important rule of thumb to keep in mind when tackling credit card debt is to never use home equity, or any form of credit line for that matter. This is due to several reasons that can put you in a worse position. For starters, credit card debt is unsecured, meaning that if a creditor went after you, they'd have no way of trying to claim what you owe. There are no assets backing the debt, so nothing is put at stake. If you utilize a home equity loan however, you end up putting your home on collateral. Even if you clear your credit card debt, you're still left with facing the equity loan debt, and if you can't manage that, then you could very well lose your home. That's why this method should be avoided.

Another maneuver that should be avoided is using a 401(k) as a means of paying debt. This is not ideal because your 401(k) loan ends up being taxed due to payments made on after-tax money. In other words, even though your 401(k) isn't taxed in itself, the money you put out against it is. Also, when you finally withdraw the 401(k), you tax your savings. Being taxed two times isn't ideal when you're working with what should be your retirement savings, so remember that.

Basically, what it comes down to is to avoid loans of any kind to pay back debt. This is especially true regarding in credit card debt relief. Any form of loan is a form of debt, and moving debt around is inherently suboptimal when it comes to trying to get out of it in the first place. Whether you use your home as collateral or dip into your retirement, you're making a move that isn't safe in the long-term sense. Although your results may vary, it's ultimately better to try and pay your debts using money you actually have. That way, you'll be making real progress.