I’ve seen advice out there that doesn’t recommend that you take on more debt to pay off existing debt and I think that’s a bunch of baloney, who’s writing those articles? Credit card companies? It’s math… if you’re borrowing debt at 20% and you can borrow more debt at 19.99%, then borrow debt at 19.99% and pay off your 20% debt! While that is a drastic example, considering your time is worth something, you really should look into ways of reducing your debt’s servicing costs (the interest rates) so that you can accelerate your schedule of paying down the debt. So, why do places advise that you shouldn’t borrow money to pay down debt? I have no idea because you can’t argue against the mathematics! (no better way than to use 0% balance transfer deals)

For a prime example of how you can pay off your debt faster by borrowing, look no farther than Tricia from Blogging Away Debt. By borrowing from numerous sources, including Propser.com, and simply asking her credit cards to lower their rates, she was able to reduce her monthly interest payments from $400 to $100, on a debt of nearly $25,000!

So should you borrow money to pay off debt? Only if you want to save money!

The question hinges on whether, given a choice, you should send in a little extra to a debt that you have that is smaller in amount or one that is larger in interest rate. You may think this is a no brainer but it’s actually more about psychology and less about math and it’s a topic personal finance guru juggernauts like Dave Ramsey have tackled in the past.

Dave Ramsey argues that you should pay off the smaller debt because the psychological boost you get from that will spur you towards paying off the other debts. Consider a $1,000 debt and a $10,000 debt and the ability to send an extra $100 with your payment. That extra hundred dollars is 10% of your smaller debt but a mere 1% of your larger debt, regardless of their interest rates. If you keep aggressively paying off your debt each month, you could conceivably erase the $1,000 debt in ten months - it would take you 100 months (it’s actually much more because of interest but we’ll leave it at that for simplicity’s sake). A lot can happen in 100 months and Dave argues that you should pay off the smaller one as fast as possible and then use that payment, which will no longer go to servicing the smaller debt, on the larger debt. This snowball will grow and grow until you’re debt free.

Now, the fallacy of this argument is that you’re paying off a debt that’s growing at a slower pace and with a slower starting amount. $1,000 at 20% will grow by $200 after a year; $10,000 at 20% will grow by $2,000 after a year - that’s a staggering difference of $1,800. As my friend Nickel has said in the past, poor Dave Ramsey is woefully bad at math!

What you should do is pay off your larger debt high interest and then, in the same fashion, use that payment to quickly accelerate the payment of your smaller debts. Don’t listen to Dave Ramsey on this one, it makes psychological sense but not financial sense.

This is part of a series of articles taking a closer look at the tips provided by Bankrate’s Debt Counselor’s 15 tips article.

2. If you co-sign, that debt is yours.
If your son or daughter wants you to co-sign for a car, apartment or loan, just say no, says Trent Graham, manager at GreenPath Debt Solutions. Debt counselors see this one a lot. Often, the other person defaults, leaving the co-signer to pick up the payments. Having to suddenly shell out an extra $350 per month can really squeeze a family budget.

This lesson should be part of Personal Finance 101 - if you sign a loan, you are responsible for it. If you co-sign a loan, you are also responsible for it. The reason why the lender wants you to co-sign isn’t because they just want you to vouch for the credibility of your child or friend or neighbor - they want you to co-sign because they want your assets and your ability to pay to back up the loan. If that person isn’t credit worthy enough to get the loan in the first place and will require you to put up your credit worthiness, perhaps they’re not ready for the loan.

Source: Bankrate