Beware These 5 Debt Traps

Alamy I have plenty of experience going into debt. I've spent over half my life paying down a mortgage. I've taken out more than one home equity loan and have made more than my share of car payments. Have I ever been debt-free? Yes, for the first 18 years of my life. But now that I'm approaching retirement, I am nearing that state of equanimity once again. So I know how to get in and also how to get out. There are plenty of ways to dig yourself deeper into the hole. For most of us, these are the top five debt traps: 1. Stretch out the car loan so your monthly payments are less. If you take out a three-year loan of, say, $20,000 at 1.9 percent interest, your monthly payment will be about $573. But if you go for the four-year loan at 2.9 percent, the monthly payment is only $443. And the five-year loan at 3.9 percent is just $368. However, for that lower monthly bill, you will have paid $2,095 in interest by the end of five years, compared to only $628 for the three-year loan. 2. Pay the minimum balance on your credit card. When the bill arrives in the mail it tells you that you have options. You can pay the full amount -- say it's $1,200 -- or you can send in the minimum of $25. That seems like an easy choice, until you find out the interest rate on your unpaid balance is around 15 percent. If it takes you five years to pay it off the interest will add a whopping $500 to that initial $1,200 charge. And if you ignore the bill until it's past due you might incur an extra penalty of $25 or more. Even worse, if you write one of those checks the credit card company sends you, that cash loan could cost you a usurious 25 percent interest or more.