Debts. There are bad ones and good ones. Unfortunately, many people accumulate the bad ones, and untangling yourself from financial slavery is an uphill task marred with slippery edges.
WalletHub says Americans are headed down the same path as was the case before 2008. This path led to financial disaster due to over-leveraging.
The Federal Reserve hinted at increased interest rates and the slightest rise means a hike in essential household goods. This not good news in any way, and after the bubble bursts, it’ll be difficult to sail through the economic downturn, especially with debt on your shoulders.
Therefore, the best way to stay safe is by clearing any outstanding debt. However, many people commit the same common mistakes when paying off their debts, which either results in an extended debt-paying period or ending up in a worse financial situation than before.
Read on to find out whether you’re committing these common mistakes when paying off your debt.
Not Having a Debt Management Plan
Everything in this life requires a plan in order to succeed. With a plan, you have direction and goals you can set. Therefore, even when paying off your debt, it’s vital to have a solid debt management plan or strategy.
First off, you want to analyze your current situation. This includes stating your current debt situation. How much are you in debt? How much do you earn per month? Which is the best way forward to clear the current debt? When do you think you’ll be able to clear your debt?
These hard but crucial questions will help you craft a perfect strategy. Not all strategies are alike because financial situations differ from one person to another. Some people will want to tackle the debts with high interests first, also known as the avalanche method. Others will want to use the snowball method. In this strategy, you’ll start paying off the debts with the lowest balance and then move in ascending order until all you’ve cleared all your debts.
Clearing the Wrong Debts First
While developing a debt management plan is good for your finances, it’s also important for you to clear the right debt first. Regardless of the type of technique you’ll use, the bottom line remains using a strategy that allows you to make huge strides over a specific period.
Let’s take a practical example. If you have a student loan debt worth $30,000 and a high-interest credit card debt totaling $7,000, then the smart move would be to start with the high-interest debt and then move to the student loan despite its high balance.
The reason for this is that credit card debt comes with high interest and if left to pile up over time, it’ll be difficult to clear. In contrast, student loans have low interest rates, and they won’t accrue as fast as the credit card debt over a similar period. Thus, it’s a smart move to start off with reducing and then eliminating the credit card debt.
Accumulating More Debt
It makes no sense paying off your credit card debt and using the card at the same time. It’s like filling a broken container, an absolute waste of time and resources. Unfortunately, many people make this mistake.
Often the main driver to continue using your credit card is to earn various rewards such as cash backs and airline miles. However, this doesn’t help a bit. It only cancels your progress. At the very best, you’ll mark time, and the additional interest will by far outweigh any rewards you’ll earn.
Therefore, it’s advisable to stick to a cash-only budget when trying to clear off your credit card debts. There’s simply no other way around it.
Not Addressing the Root Cause of the Debt
You cannot solve a problem if you don’t understand the problem and what led to it in the first place. For credit card debt, the reasons are one of three:
- Maintaining the same lifestyle despite losing your job.
- Running into unexpected bills such as family emergencies.
- Receiving your reimbursable expenses after the bill is way past due and aren’t…
It could be one or all three combined. However, it’s important to identify why you ended up in debt in the first place. Most of the time, it’s because you didn’t have an emergency fund. Add that to a desire to maintain a similar lifestyle even with a financial crunch.
The best way to identify the root cause is by creating a budget. This will help you identify where all the money is going. After finding and fixing the leaks in your finances, it’s time to create an emergency fund by using the money you used to spend on unnecessary items.
For example, you can adjust your lifestyle by quitting cable and eating out, among other methods.
Lack of Willpower and Dedication
Besides knowing what caused your plunge into debt, you must also have the willpower to go all the way to clear it. Your debts didn’t just pile up overnight—you accumulated them. Therefore, don’t expect to clear them overnight.
Keep in mind that debt settlement will take months or even years, depending on how deep you are in debt. As such, you need tons of willpower and sacrifice. In fact, the lack of these two is the reason why many people throw in the towel midway or even a few months into their journey.
To help you maintain the momentum even when you feel like giving up, ask yourself why repaying debts is important. Will it change your financial situation and overall lifestyle? With a clear goal in sight and the right mentality, you’ll have the strength to forge ahead, even in difficult times.
It’s also important to hang around positive people, those, who’ll help you achieve your goals and not drag you behind instead.
Worrying About Your Credit Score
Your credit score doesn’t matter when paying off your debt. Now that this myth is out of the way, how about if you stop worrying about your credit and pay off your debt!
You aren’t borrowing, and neither are you searching for a new job. You’re trying to offset a financial burden. Thus, your primary concern should be your total debt and how you can slice off digits from the overall number. In the long run, by reducing your debt, you also improve your credit. It’s automatic.
Ever heard of the credit utilization ratio? No?
This is your credit limit set up against your already utilized credit. If the ratio is above 30 percent, then you’re in the red line. One of the ways to bring down this ratio is by clearing your debt.
Now you know the most common mistakes people commit when paying off their debts and how to overcome them. However, the most important step in this entire process is to have a plan. Similar to a compass guiding a traveler, a debt management plan will guide you through the journey toward a debt-free life.
After paying off all outstanding debt, you’ll have a handsome amount you can throw into your emergency fund or savings account to help you accomplish other financial goals.