How to Avoid Debt Mistakes
All too often, people with good intentions make financial mistakes. But you don’t have to! You can avoid some of the common mistakes that derail people’s financial lives. Learn how to avoid making bad debt mistakes, and sleep better tonight.
The 4 Worst Debt Mistakes
- Paying off small debts first: This is a common mistake. People think that because a debt is small, it’s easier to pay it off. Tackle your highest-interest-rate debts first, and make minimum payments on the lower-interest-rate debt. After you have paid off the highest-interest-rate debt, work on the debts with the next highest interest rate, and continue making minimum payments on the lower-interest-rate debts. To determine the interest rates on your debts, contact all of your creditors and ask how much you owe, what your current interest rate is, and what your minimum monthly payment is.
- Using a home equity loan to pay off unsecured debts: This is a big no-no! It’s dangerous, and it can have disastrous consequences. By adding unsecured debt to your mortgage, you increase what you owe. Any increase in debt increases the risk that you won’t be able to pay your debt if something happens (like a loss of income, or a financial emergency). You don’t want to lose your home because of charges you made on your credit card. Keep unsecured debts separate from secured debts. If you can’t pay your unsecured debts, you may get collection calls, but you won’t be in danger of losing your home. Add it to your mortgage, and you could face foreclosure if you are unable to pay what you owe.
- Using your credit card to pay for daily living expenses: Don’t use your credit card to pay for your groceries, utility bills, or other daily living expenses. Use it to pay for your big ticket items and online purchases, as these are covered by consumer protection laws. Just remember to pay off the charges for your online purchases in full after you receive the bills. Use cash or your debit card to pay for your everyday living expenses. If there isn’t enough money in your budget to cover all of your living expenses without relying on credit, it’s time to take a good hard look at your budget. You may either need to cut some expense or come up with additional income.
- Making minimum payments on credit purchases: If you are only making the minimum payments on your debt, stop it now. You run the risk of paying more than the original purchase price. Here’s an example of an $8,000 credit purchase:
- Credit purchase: $8,000
- Interest rate: 18 percent
- Minimum monthly payment: $200
- Years to pay off: 5
- Total interest paid: $4,308
Avoid paying that type of interest by paying at least three times the minimum monthly payment.
Getting out of debt is an important goal. In order to achieve this goal more quickly, avoid making simple debt mistakes. The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!