Paying off debt is one of the smartest money things you’ll ever do — but sometimes doing so is easier said than done.
Credit cards, student loans, and car loans can — if you don’t stay on top of things — quickly become a debt albatross that weighs you down. Many people, unfortunately, pursue financial decisions that exacerbate a bad situation faster than they can blink.
Developing an effective and smart debt repayment strategy is the key to getting back on track. Depending on the situation you find yourself in, you might want to speak to a bankruptcy lawyer to explore the best options on the table. “Bankruptcy” is a scary word for many people, but sometimes going that route is the best way to start over.
However, it’s easier to avoid debt problems than to fix the issues when they wreak havoc. With that said, here are five of the most frequent mistakes individuals commit when dealing with debt — and how to avoid these missteps.
Evading the Origin of Debt
The biggest mistake that people make when tackling debt is failing to consider how they got to that situation in the first place. If overspending, poor budgeting, or a lack of incoming funds created the debt, you need to make changes to correct the errors.
Until and unless you get to the root of the matter, the odds are you’ll get yourself back into debt even after climbing out of the hole.
You can prevent or get out of debt by tracking spending to identify areas of concern, creating a realistic budget, setting restrictions on the use of credit cards, and starting an emergency fund. Understanding your triggers will help you make wiser decisions in the future.
Paying Only the Minimum
Paying just the minimum over the short term might make sense if you’re strapped for cash. However, that should be a short-term strategy since that will leave you stuck in debt for years and cost you a lot more in interest charges.
Minimum payments essentially pay interest to keep you afloat. They don’t reduce the principal. You can avoid this problem by paying more than the minimum whenever possible, using debt reduction strategies like the snowball method, and reducing discretionary spending where possible.
Making extra payments each month, even if these extra amounts are small, can save you a lot in interest and get you out of debt sooner.
Debt Not Being Paid Off
All debts are not equal. Some should be prioritized over others if you’re to get things under control. High-interest debt — typically credit cards or payday loans — translates to higher interest rates.
Add up all your balances and debts with their corresponding interest rates, and pay off the highest-interest debts first using the avalanche method. Consolidating or refinancing high-interest debt is also a good idea if you can secure good terms.
Overreliance on Debt Consolidation Minus a Concrete Plan
Consolidation of debt is a good tool, but far too many people see it as a silver bullet. Remember that consolidating debt does not repay debt — it merely rolls it into one big loan. Without changing spending habits, any relief you get will be temporary.
Use debt consolidation as a good option rather than as a last resort. It’s also essential to compare terms carefully to consider fees, extended loan terms at higher interest rates, and other things.
Consolidation can simplify payments and reduce your interest rate, but it must be accompanied by good money management.
Not Seeking Help Early Enough
Pride, shame, or fear keeps many people from seeking help after they are deeply in debt. However, delay can lead to late fees, bad credit, or a lawsuit.
Procrastination closes off your options. The earlier you move, the more likely you are to be able to negotiate a payment plan with your creditors.
It’s best to seek guidance from a not-for-profit credit counseling agency, and negotiate hardship terms or payment plans with your creditors.
Debt management takes discipline and planning. Avoid these common pitfalls for the best results.
The key to long-term success is not merely to pay off the debt you’ve already accumulated. It’s also about learning the skills and attitudes involved in not going into debt in the first place.
With a good plan and the drive to change, you can take control of your money and create a better, safer financial future.
