The Three Worst Types of Debt

High debt load is a problem for many American households. Some types of debt, like a mortgage, are practically unavoidable. But others are often unnecessary and can be devastating to your overall financial picture. To keep your financial outlook healthy, avoid these three types of debt.

Payday loans. You may have been tempted to use one of these loans at some point, because they’re easy to get and the approval process is so much faster than most other loans. But with interest rates as high as 500 percent annually, and often additional fees on top of that, these are some of the most expensive loans in the finance industry. It may take just a bit more time to apply, but your own bank will probably make you a short term loan with much more agreeable terms. Borrowing from family or friends is another option in an emergency. It’s embarrassing, but they probably won’t charge you 500 percent interest!

Credit card debt. Another option when you have an emergency is to use a credit card. Credit cards can actually be worthwhile tools if you use them correctly, but a problem can arise if you use them too often for too many “emergencies”. Balances grow quickly and interest adds up fast, and then it can be difficult to pay off the balances. With interest rates reaching as high as 30 percent these days, it would pay to analyze your spending habits and cut back on the credit card use if you can. Try not to charge more than you can pay off each month.

Unpaid taxes. We all dread paying taxes each spring, but the IRS isn’t joking around when they send you that bill. If you don’t pay your taxes on time, you can be charged interest and penalties. To top it off, the interest rates are often worse than your credit cards! Even if you have to take out a low-interest loan, it makes sense to pay your taxes on time. If you aren’t able to file by the April 15 deadline, remember to file an extension to buy yourself six more months. In the future, you can adjust your tax withholding from your paychecks so that you don’t end up owing money in the spring.

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