By Ann Sullivan
Accumulating debt is easy. You start out with good credit and can easily lose track of your spending. Add to that, your credit card companies keep raising your credit limit. Before you know it, the payments become more than you can comfortably afford. There are many mistakes people make when trying to get out of debt. Reducing or eliminating debt is not just about not using your credit cards or maxing them out. It’s about changing habits that got you there in the first place. If you’ve found yourself in a situation where you have considerable debt, here are nine mistakes you should avoid when trying to get out of debt.
1) Keep Spending the Same Way
One of the biggest mistakes people make in trying to get out of debt is doing things the same way and expecting different results. The worst mistake is to keep spending money on unnecessary things and not scrutinizing where you can cut down. If you’re serious about getting out of debt, it’s time to put your nose to the grind stone and seriously evaluate what your spending habits are. This involves creating a budget, if you don’t already have one. Start with the most necessary things, such as monthly bills including rent or mortgage, utilities, and everything that recurs each month. Next, review other necessities such as groceries and gas in the car. The third part of your budget should include flexible spending. Here’s where you need to seriously consider what you’re buying that may not be needed. There will be some sacrifices here, so be honest when reviewing this part.
2) Going it Alone
Some people dig a hole so deep, they don’t know where to turn for help. When it gets to this critical juncture, it’s time to see outside assistance. Here’s where researching and understanding available services is critical. There are some debt relief companies that will take advantage of such as situation. There are others that are non-profit and can genuinely help you. Be sure to do your homework. Take advantage of free services when trying to determine the best course of action. Sites such as debt.org can offer free counseling and tools to help you understand your debt, and what relief options are available. Jumping straight to bankruptcy as a quick fix is not always the best solution. There may be options available to avoid this and it should be used as a last resort when all else fails.
3) Not Creating a Practical Budget
Not having a practical budget could be the cause of your debt issues in the first place. If you don’t operate on a budget currently, now is the time to start. If you don’t have an idea of what you can afford without creating more debt, that’s a big mistake. The rule of thumb should always be, don’t spend money you don’t have. The second rule is, don’t borrow from Peter to pay Paul. Create a budget that’s practical and based upon your income to expense ratio. That way, you’ll get in the habit of knowing what you can afford without charging it and creating more debt. If you withdraw cash on one credit card to pay another, or pay your bills, you’ll only be creating a snowball effect. The interest charged on most cash advances is something that will follow you for quite some time. Avoid doing this!
4) Trying to Tackle Everything at Once
When reviewing your debt situation, it’s a mistake to try to solve it all at once. After all, it didn’t occur all at once. The best course of action is to look at the overall picture but take each thing one step at a time. Trying to tackle it all at once can become so overwhelming, you may think there’s no way out. Every problem has a solution. Remaining calm and assessing your debt realistically will help you to handle things better. Start with the most important things, such as your mortgage and car payment. These are more than likely necessities, unless your plan includes some major changes. Once you get down to the basics, look at where you can trim unnecessary spending, and add that to your debt payments, such as credit cards, or paying more on your car loan to pay it off faster.
5) Using Savings for Bills
Experts advise you should always have a safety net of savings put aside for unexpected events. If you’re trying to eliminate debt, don’t use your savings to make larger payments on your debt. It’s advised you should have 3-6 months of living expenses put aside in case of something unexpected that affects your income. Being serious about getting out of debt may require some sacrifices. It will also require you to look at how you spend. Are you constantly living beyond your means? That’s more than likely how you accumulated so much debt in the first place. The key is to hold onto your savings and reduce your spending. It also means, as stated previously, not accumulating more debt while you’re paying debt off. They key is in your spending habits. You may be surprised what you can cut down on if you seriously scrutinize it.
6) Not Planning
Eliminating debt is something that requires a plan. You can’t wing this. It’s time to get serious and evaluate where you are in your debt situation. It’s also time to create a strict budget and stick to your plan. If you want to reduce or eliminate debt, it needs to be taken seriously. Having a definitive plan of action will help you to achieve your goal and give you inspiration to do so. That’s not to say it must be done all at once. Rome wasn’t built in a day, as they say. It does mean your plan should be practical and realistic and include cutting down on unnecessary spending. It also means evaluating spending to see where you can cut or reduce expenses. The more you can do this, the more you can put towards paying your debt off.
7) Falling for Low or No Interest Offers
When you’re trying to pay off debt, it’s a big mistake to take on more at the same time. If you have good credit, chances are you get wooed by offers for low or no interest credit cards. To some people, this can be very tempting, especially when things are already running tight. Don’t give in to temptation. Experts advise you should never take on more debt when you’re trying to pay debt down. If you’re using a low or no interest card to transfer a balance from a higher one, don’t use it for anything else. The goal is to eliminate, not accumulate, debt. This means, if you really want to get out of debt, do not accumulate any more at all for any reason. It could cause a tailspin effect which you may not be able to recover from quickly or easily.
8) Worrying Too Much About Your Credit Score
Some people seem obsess about monitoring their credit. With today’s technology, it’s easier than ever to keep track. Experts advise, don’t obsess about it. Your credit score usually only matters when you’re trying to borrow money; which you are not if you’re looking to eliminate debt! Paying debt down, and having a low debt to credit ratio, will improve your credit score on its own. Paying your bills on time also matters when it comes to your score. When creating a plan to get out of debt, you should focus on the total amount of your debt. It’s okay to have credit cards with a zero balance. This will not cause your score to drop. As you eliminate your debt, and your score rises, you’ll be putting yourself in a position for low interest rates down the road if you do need to borrow again for something unexpected.