Common Mistakes to Avoid When Paying Off Debt
Struggling with debt? Paying it off can be difficult. However, if you are focused, dedicated, and avoid these common mistakes, you’ll have a much better chance at eliminating your debt.
Not Having a Plan
Paying off debt sounds easy, however, if you don’t have a plan and a strategy, you could be spending a lot of money and effort without seeing much progress. Having a plan will help you reduce your debt in the most effective way. This won’t just help you pay it off more quickly, but it will keep you motivated. If you can actively see your debt decreasing, you’ll be inspired to keep going.
To come up with a plan, you have to make sure that you truly understand your debt and your financial situation. How much debt do you owe? What are the interest rates on your various debts? How much can you afford to repay each month? A good place to start is to sit down and figure these things out.
Once you have a better idea of your situation, you can create a strategy for reducing your debt. Two of the most common methods are the “avalanche method” and the “snowball method.” Both methods involve prioritizing your debt and focusing on paying down certain debts first.
With the avalanche method, you focus on paying off the debt with the highest interest rate first, putting as much money as you can on this debt while making minimum payments on your other debts. This can help you save a lot of money in interest charges.
The snowball method involves paying off your smallest debts first, which can motivate you to keep going as you see various debts disappear.
Whatever strategy you use, it’s important that you have one so you’ll be able to maximize your efforts. For more tips, read our post on How to Pay Off Debt or Eliminate Debt.
Taking Out Loans to Pay Debt
Taking out a consolidation loan to pay off your debt sounds like a good idea at first. You’ll only have to worry about paying back one debt instead of several, which makes the process of debt repayment easier. You might even be able to get a lower interest rate on your new loan, which can save you money. However, in reality, it can be difficult to get a low interest rate on a consolidation loan, especially if you have bad credit due to missing debt payments in the past.
Also, taking out a loan to repay your debt doesn’t actually reduce the overall amount that you owe. This means you’ll still need to pay back the same amount, even if the interest rate is lower.
It’s easy to forget to pay a bill. Life is busy and various debt often have various due dates. However, if you miss debt payments, you don’t just end up hurting your credit rating, but you end up increasing the amount you owe, since you’ll be charged interest and penalties.
Whenever possible, automate debt repayment. Your bank should let you set automatic payments each month, so you won’t ever miss a payment.
Still Using Credit Cards
When you’re trying to reduce your debt, you need to stop accumulating new debt. Some people try to keep using their credit cards, aiming to pay off their existing debt along with any new charges. In reality, this is very difficult to do. If you want to pay off your debt, you need to stop adding to it.
This will mean that you’ll have to restructure your budget so that you can live on cash. Need some help? Read our Tips for Living on Cash.
If you’re tempted to keep using your credit cards, lock them away inside a safe, freeze them inside your freezer, give them to a friend, or do whatever it takes to stop using them. Make sure to delete saved cards from any online shopping websites or apps that you use as well.
Not Addressing the Causes
It isn’t just important to pay off debt, it’s also critical that you understand how and why you got into debt in the first place. If you don’t take the time to understand the root causes of your debt troubles, it’s very likely that you’ll end up struggling with debt again in the future.
Two major reasons people end up in debt is that they spend more than they can afford, or that they don’t have an emergency fund, so an unexpected expense sends them into debt. To solve both of these issues, you’ll need to create a budget and stick to it. Make sure to create a category in your budget for emergency savings, as having an emergency fund will help you avoid falling into debt when life is unpredictable. Here are some pointers to help you Create a Budget That Works for You.