From credit cards to student loans, there are dozens of ways to get wrapped up in debt. Look out for these common mistakes to help you get out and stay out of debt.
1. Credit card debt
Do not spend beyond your means every month and rely on your credit card to make up the difference. Using credit cards for everyday expenses – groceries, gas, and the like – can land you reward points or cash back. Plus, cards are a requirement for some purchases, such as booking a flight. However, lingering credit card debt is nasty. Most credit cards come with high interest, so any lingering debt increases daily. Make sure you are only using your credit card on things you can – and will – pay off by the end of the month!
If you are currently bogged down by credit card debt, rest assured you are not alone. First, stop charging things to your credit card, or you will never get out. Try setting up a cash only budget for your expenses. Once you have stopped using your credit card, start paying it off. If you have debt with multiple cards, pay them off one at a time, beginning with your highest interest card. It takes time and discipline, but it is escapable.
2. Amassing bad debt
If you ever borrow money, it should be as an investment in your future. This means debt such as car or student loans, or your mortgage. Also remember that you should only take on that debt when it makes sense for you. This kind of debt tends to be unavoidable in today’s society. However, these purchases tend to grow in value or increase your earning power, which makes them “good debt.” In contrast, “bad debt” is money you borrow for purchases that decrease in value, and this debt can jeopardize your financial security.
Try not to borrow for a lifestyle outside your means. This means avoiding credit card debt as well as avoiding loans to fund anything from normal expenses to fancy vacations. Reserve debt for big financial moves that will ultimately provide you with value, or are necessary. This is particularly difficult with car loans, as they are technically bad debt. If you do have to take out a car loan, try to keep it as small as possible. And if you have already amassed bad debt, stop adding to it and start getting rid of it with budgeting.
3. Paying late
Always make your payments on time and, as much as possible, in full. Constant late or missing payments can cost you hefty penalties and lower your credit score. Try to pay at least the minimum on all your payments each month. Ideally, pay more than the minimum, as this will help you get out of debt faster and without accruing as much interest. If you struggle to remember your payments, take advantage of automatic payments, and try setting reminders on your phone calendar.
4. Paying only the minimum
If you cannot make your payment in full, try paying as much as you can. While the smaller payment is tempting, it will ultimately cost you more money due to loan and debt interest rates. Try to pay your credit card in full every month, or at least keep your balance as low as possible. Pay as much as you can over the minimum of other kinds of debt to shorten the lifetime of your payments and reduce the amount of interest you pay. Make sure you create your budget with room to make those bigger payments.
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5. Not budgeting
Budgets are important. The only way to get out of debt is to stop living beyond your means, and the only way to stop living beyond your means is to stick to a strict budget. Keeping everything written and planned out will help you visualize both how much money you have and how much you are spending – and therefore how much you can spend. Keep your goals realistic and give yourself space to work towards paying off all of your debt.
6. Not having a clear plan
While a budget plans how much money will go where, you also need to plan which debt gets paid off first. Debt is not easy to get rid of, and it requires a lot of attention. In addition, payoff periods on some kinds of debt can be extensive, so planning a timeline will help you track your progress. Make sure you pay in order of highest to lowest interest rate, while always paying minimums across the board as you go.
7. Forgetting credit card debt
As previously stated, you should always pay off your highest interest rate debt first. Most of the time, this is your credit card debt. However, if it is not, you might still want to focus on that credit card debt first. Credit card debt is revolving, unlike fully amortized loans where you pay everything off in regular installments. If you do not pay off your credit card balance in full, the amount you owe grows as interest accrues. This can trap you in an endless cycle of debt if you do not first focus on ending it. Also remember that, if you are trying to pay off your credit card debt, it is a bad idea to continue charging your card.
8. Ignoring your lender
Never underestimate the power of a phone call or meeting. Lenders want their money, and they want you to be able to pay it. Chances are, a simple conversation will lead to a solution, whether that is a lower interest rate or a simple payment plan. Lenders would much rather accommodate your struggles than lose your regular payments. Be friendly, not adversarial.
9. Extending your loan with a repayment plan
Some federal student loan repayment plans allow you to make smaller monthly payments. While this can make student loans look manageable, these plans ultimately increase the cost of the loan by stretching the interest over time. Never cut corners on debt you are already making minimum payments on. Instead, try rearranging your budget to accommodate the cost of the payments as is, and seek expert help if necessary.
Debt is nasty, difficult, and generally unpleasant. However, if you stick to your budget and strive to avoid making these nine mistakes, your debt will look much more manageable.
Photo: Georgette Miller Law