The worst debt decisions in life don’t necessarily have to be defeating. After taking a long, hard look at your financial situation, you can turn those debt problems around.
That’s the good news from these seven worst debt decisions. Taken with an attitude that they can be fixed, they can be learning experiences for the person who suffered them, and for anyone else willing to avoid such trouble:
1. Buy a used car with a credit card
This sounds like a bad idea from many angles: You’re paying interest on a credit card for a long-term purchase that’s declining in value and is more likely to break down than a new car.
But if you’re in desperate enough need, it’s a decision you might have to make. Patricia Sterbenz was that desperate 25 years ago as a mother of six working part-time and in need of a vehicle. After months of searching, she found a van at a used car lot.
“I guess the salesman could see the desperation in my eyes since I had been turned down at major dealerships,” says Sterbenz, who is now in the nutrition business.
“After several hours of searching for creative ways to purchase the van he suggested I put the purchase on my credit card since it had a very high limit,” she says. She did, and drove home, not realizing the impact.
She later had a major event that caused her to be late paying the credit card bill several times. While Sterbenz always made the payment, she missed the due date by several days, causing the interest rate to skyrocket. Years later she took classes in debt reduction and turned things around, proving that one of the worst debt decisions in her life turned out to be a learning experience.
2. Pressured to file for bankruptcy
Filing for bankruptcy doesn’t have to be one of the worst debt decisions ever. In fact, it can help many people. However, if you’re pressured to file for bankruptcy without first knowing all of the consequences, as Miriam Nicole Huffman was, then it can be one of the worst debt decisions you’ve ever made.
[pull_quote align=”left”]”Having a bankruptcy on my credit made it very difficult to obtain the job I wanted, obtain a reasonable rate on auto insurance,” says Miriam Nicole Huffman.[/pull_quote]Huffman, who now works as a relationship finances specialist, says her worst debt decision was allowing her ex-husband to convince her to file a solo bankruptcy.
“Having a bankruptcy on my credit made it very difficult to obtain the job I wanted, obtain a reasonable rate on auto insurance,” and pay double-digit interest for credit, she says. “If I had it to do all over again, I would have negotiated a non-bankruptcy settlement directly with my creditors.”
3. Get a payday loan
Since most payday loan borrowers renew their loans within two weeks of getting them, it’s easily apparent that payday loans can be the worst debt decision ever.
Taking out a payday loan to tide you over until you get your next paycheck, and doing this again and again, isn’t just a way to get over a financial emergency. It’s a way to put you in a cycle of debt and is proof that you’re living beyond your means.
4. Apply for store credit card
A store credit card is different than a regular credit card, in that it can only be used at the store you got it from. Unless you go to the same store every week, it’s not a smart credit decision and could become the worst debt decision of your life.
Store credit cards are offered to customers as a way to save money at the checkout counter — such as 20% off a one-time purchase. That sounds like a good deal on the surface, but if you don’t pay the store credit card bill in full when it arrives, you’ll end up paying high interest rates of 20% or more and the bargain you got will disappear.
5. Help a relative with credit
Helping a friend or relative who can’t qualify for credit by co-signing a loan is one way to hurt your credit if they don’t repay the loan. Co-signing a loan means you’re fully responsible for the loan, which could hurt your relationship and your wallet.
[pull_quote align=”left”]”My lesson learned was to not allow a person to influence you into things that could haunt you in the long run, no matter if they are family or not. It has taken me years to finally get these items off my credit and cleared up. Money spent on things I never seen or enjoyed,” says TaCreacia Blunt.[/pull_quote]The worst debt decision that TaCreacia Blunt of Orlando, Fla., says she made was allowing her aunt to talk her into opening a few store credit cards in Blunt’s name for her. Blunt also put the aunt’s electric and phone bills in her name.
“In the end I had my credit destroyed and had to pay a very high deposit when I moved into my own place,” Blunt says.
“My lesson learned was to not allow a person to influence you into things that could haunt you in the long run, no matter if they are family or not,” she says. “It has taken me years to finally get these items off my credit and cleared up. Money spent on things I never seen or enjoyed.”
6. Buying too much home
This worst debt decision was more popular around 2000 when home loans were easier to get for people with poor credit, but it’s still an important lesson to remember for anyone who wants to buy a bigger and more expensive home than they can afford.
“We just went through a big, teachable moment with the recession,” says Paul Golden, a spokesman for the National Endowment for Financial Education, or NEFE.
Home buyers should avoid the upsale from their real estate agent and mortgage broker, and stick to the rule of thumb of having no more than 30% of their income go to housing expenses, Golden says.
7. Get a student loan when you don’t need it
A student loan can be a lifesaver for a college student who really needs it. It can also drag down their finances for years as they repay the loan. For a student who really doesn’t need the loan, it can be the worst debt decision of their young life.
[pull_quote align=”left”]”The ease to attain it created a frivolousness that didn’t allow me to look ahead. All I saw was what I wanted,” says Marcus Carter of his student loans.[/pull_quote]That’s what happened to Marcus Carter, a military veteran who returned home from overseas in July 2001 and was able to afford to go to a state university for free with his military benefits. Carter says he “greedily” applied for student loans even though he didn’t really need the money because his military benefits paid for his education.
Carter borrowed $45,000 and spent it on things such as “alcohol, women, clothes, weed,” as he puts it. “The ease to attain it created a frivolousness that didn’t allow me to look ahead,” he says. “All I saw was what I wanted. Right at those moments. I was able to live a life other people my age couldn’t, and could afford to embellish on that.”
He now has “as much debt as any other college grad, but mine is because I wanted a little extra money and didn’t think long term,” Carter says of his worst debt decision.
His student loan debt is now down to $43,000, and he’s on track to pay it off in about 10 years.
Student loan debts are outpacing credit card and auto loan debts in the U.S., and students should be wry of using them for living expenses, a spring break trip to Mexico or for other purposes not related to education, says NEFE’s Golden.
8. Consolidating debt can be worst debt decision
Putting all of your credit card debt in one bill can be appealing for people burdened by debt, but they should be aware of the extra fees. Interest is front-loaded onto the debt consolidation loan, Golden says.
People who do this should also close the credit cards they consolidated, otherwise they run the risk of using the cards again and doubling their debt, he says.
Those are the eight worst debt decisions we found. What’s the worst debt decision you’ve ever made and how did you learn from it? Tell us in the comments section below.
