Once you have decided that the only way forward to make that dream home purchase…
Resolving to get out of debt can change your life. You need to go about it the right way, however. Making up your mind to be debt-free isn’t enough. You need to make sure that you understand every factor that contributes to your debt, and work to control it. What follows are 8 mistakes that people often make when trying to pay off debt. These are mistakes that you need to watch out for.
You keep the same old spending habits
It’s one thing to promise yourself that you will turn your life around; it’s quite another to live up to that promise. Many people make the mistake of keeping their old habits, and then wonder why their finances don’t improve. Changing your old habits can mean swallowing your pride and declining when your friends invite you to lunch at a restaurant. It can involve watching whatever you can for free on television, rather than going to the movies. It also involves not replenishing your wardrobe on a regular basis and allowing yourself to be seen in the same outfit more than once. It isn’t enough to simply promise yourself that you will change. You need to actually make sacrifices.
You try to get out of debt alone
It can be hard to change your money habits when you continue to be surrounded by your regular friends and family. You need to be around people who are frugal, so that being frugal yourself feels normal. Signing up to a credit card counseling service can help you see other people who try hard to be financially responsible. It can help make your new choices seem more normal.
You sign up for debt-relief without understanding what it calls for
Many people sign up for debt relief but are then surprised to learn that it takes as long as five years to work. It’s important to understand that there are no quick fixes when it comes to correcting an unstable financial situation. You need to build an emergency fund and regular savings if you are to not lean on your credit cards for emergencies. You also need to slowly repay your debt. All of it takes time, even with debt-relief.
You don’t have a practical budget
It’s nearly impossible to be in control of your finances without a budget to guide you. When you go through life without a budget, you have no idea whether or not you can afford the expenses that you make. Before you know it, you’ll have tens of thousands of dollars’ worth of credit card debt. You need to draw up a budget that allows not only for essential expenses but also for savings and an emergency fund. You can only allow yourself to spare money for dining out, for entertainment and shopping, once you are able to demonstrate with your budget that you have money to spare.
You treat every debt the same
When you have a student loan, a mortgage, a personal loan, and credit cards to pay off, you may try to spread what money you have among all of them each month. While you do need to make the minimum payments necessary on every debt, the rest of the money that you have to spare should go towards paying off the loans that come with the highest rates of interest. It’s only after you finish paying off your most expensive debts that you should move your attention to the less expensive debts.
You close credit cards that are paid off
When you finish paying off a credit card, it may occur to you to close it, so that you don’t risk spending on it again. Closing credit cards, however, shrinks the amount of credit available and lowers your credit score. When you have plenty of credit, but you don’t use it, it proves to the credit bureaus that you have restraint. It helps improve your credit score.
You don’t contribute to a retirement account when you have debt
You may want to take every dollar that you can spare, and pay off your debt with it. While you should take money away from every elective expense that you can think of, you shouldn’t deprive your retirement savings of regular contributions. Retirement savings add up to huge sums over time. Time is a powerful ally when it comes to saving for your retirement. When you stop saving for your retirement, your retirement account is no longer able to grow efficiently.
You don’t monitor your credit
Experian, Equifax, and TransUnion allow consumers to order a free credit report each year. You can space out your orders so that you receive a credit report from one credit bureau every four months. You should check each report for inaccuracies that could drive down your credit score and raise your interest rates. If you don’t monitor your credit for errors, you could end up with a low credit score. It could make your credit more expensive than it should be.
Getting out of debt may be challenging, but many people make it harder than it has to be when they allow themselves to make mistakes. Staying away from the most common mistakes can help make your journey out of debt much easier.