At a Glance
The road to debt-free living is paved with good intentions. Debt mistakes such as closing old accounts or not creating a budget might seem insignificant, but they can add up over time. In this article, we’ll go over some of the most common debt payoff mistakes that people make when they’re trying to get out of debt. So, if you’re wondering how to get out of debt, grab a cup of coffee and keep reading.
Avoid These 10 Big Mistakes When Paying Off Debt
Avoid these big mistakes when paying off debt:
1. You stop contributing to your retirement account
Ceasing contributions to your retirement account now can cost you in the long run. Since your retirement account will support you after you stop working, it’s smart to start setting aside money for it today.
2. You don’t change the habits that got you into debt
If you continue to spend impulsively or don’t pay your balances in full, it’s unlikely that you’ll be able to kick your debt to the curb. While it may not be on the top of your list of fun things to do, taking time to reflect and change your money habits is essential for getting out of debt for good.
3. You close old accounts
You’re probably excited for the moment when you pay off your first account and can close it altogether. But before you do, consider your credit utilization ratio. This is the amount of credit you’re using compared to the total amount you have available. Closing old accounts can raise your ratio (you want it to be 30% or less). By paying off accounts and keeping them open, you’ll be able to lower your ratio and raise your credit score.
4. You don’t set any goals
Setting financial goals—like saving up a specific amount of money for your honeymoon or a down payment on a house—is an important part of getting out of debt. Knowing your financial ‘why’ can help motivate you to stick with your payoff plan. Your goals can help you stay on course, even when it feels difficult.
5. You don’t save money for an emergency fund
Saving for an emergency fund is important, even if you’re still paying off debt. If you neglect to set aside money for emergencies, you put yourself at risk of going further into debt should the unexpected and expensive occur, i.e., your car breaks down or you need to go to the hospital. Saving up living expenses for three to six months is recommended, although a year is preferred. Setting aside a little each month can add up over time and help you reach this goal.
6. You forget to look at your credit report
Checking your credit report for inaccuracies and getting them removed can be an easy way to boost your credit score. Since mistakes on your credit report can have a negative effect on your credit score and your ability to get approved for loans, it’s important to look at it periodically.
7. You don’t create a budget
If you don’t create a budget, you’re just spending as usual and hoping for the best. Optimism is great, but it’s not a great financial planning tool. To really keep yourself accountable and on track for financial success, you need to create and follow a realistic budget.
To create a budget, look at your post-tax income and your monthly expenses. Make sure to consider both fixed expenses, which stay the same every month (e.g., rent), and variable expenses, which can change (e.g., food). You want to make sure that you’re not spending more than you’re earning. If you are, it’s time to make some changes and cut out what you don’t need.
8. You don’t understand your debt-relief program
If you’ve decided to move forward with a debt-relief program, you need to make sure that it’s legitimate. Do some research with your local state attorney’s office or the Better Business Bureau. Make sure that the program is both licensed and doesn’t have a laundry list of complaints.
9. You try paying off everything at once
Trying to pay off all your debt at once can be both ineffective and disheartening. It’s likely that your progress will be slow, and you won’t see tangible results to keep you going. But choosing a debt payoff method, such as the debt avalanche or debt snowball, can give you a plan of attack for eliminating your bills.
Debt avalanche: With the debt avalanche method, you’ll focus your attention on getting rid of your debt with the highest interest rate. You’ll continue paying minimum amounts on the rest of your balances, but extra cash will go to the one with the highest interest rate. Once that’s paid off, you’ll focus on paying off the next highest interest rate. The debt avalanche is best for saving more money on interest overall.
Debt snowball: With the debt snowball method, you’ll instead focus on paying off your smallest debt first. Like the debt avalanche method, you’ll pay the minimum amounts on all your debts, but instead of focusing on the debt with the highest interest rate, you’ll put extra cash towards the debt with the smallest balance. Once that’s paid off, you’ll pay off the second-smallest balance. The debt snowball is best for those who need to see results quickly.
10. You keep delaying your payoff plans
One of the most important steps of paying off debt, if not the most important one, is just getting started. Waiting for the perfect time or a bonus at work can make it so that you never get started. Remember that there’s no magical moment to start getting rid of debt. The best time to start is right now.
How to Get Out of Debt Fast
If you’re wondering how to pay off debt quickly, you may want to consider lowering your interest rates. Here are three ways you can decrease your rates:
If you have a good credit score, you may qualify for a new credit card that has a lower interest rate than the card you’re currently using.
A balance transfer is when you move your existing credit card loans to a new balance transfer credit card with a 0% APR introductory period. If you can pay off your balances during the period, you’ll save on interest. However, if you can’t pay your bills by the time the intro period is over, you could be stuck with a very high interest rate.
You could also take out a personal loan. Personal loans tend to have lower interest rates than credit cards. Once you set a repayment schedule, you will only need to worry about paying one bill per month.
Paying off debt might feel intimidating, but we know you can do it. By focusing on your “why,” selecting a debt payoff method, avoiding some of these common debt mistakes, and securing a lower interest rate, you’ll be on your way to being debt-free before you know it.