Top Debt Mistakes to Avoid
I was recently at a seminar presented by Suze Orman, a very successful finance mentor in the US. She had everyone in the room of 2500 people stand if they had credit card debt that was not paid off each month in full.
To my horror 95% of people stood up. We are not managing our day to day cashflow well. Here are some tips to control the beast!
1. Falling Into Credit Card Debt
• What we mean: Don’t spend beyond your means every month and depend on your credit card to make up the difference.
• Why not: Using credit cards for everyday stuff like groceries and gas can land you reward points. And cards are essential for things like booking a flight. But lingering credit card debt is especially nasty, because the interest, which is generally high, is added to your existing balance every day.
• How to avoid it: Only pull out the plastic if you’re positive you can and will pay off the balance at the end of the month.
• Already made this mistake? Start now to change! Do a budget and pay off your cards one by one, starting with the one with the highest interest rate.
2. Taking on Debt for Things Other Than a Car Loan or Mortgage
• What we mean: If you ever borrow money, it should be for a big purchase that represents an investment in your future, and you should only take it on when it makes sense for you.
• Why not: You’ll likely have to take out loans if you’re planning to buy a house or go to university. And these purchases will often pull their own weight, by growing in value or increasing your earning power, making them “good debt.” In contrast, amassing “bad debt,” funds borrowed for purchases that decrease in value, can jeopardise your financial security.
• How to avoid it: Don’t borrow to live a lifestyle that’s out of your reach. Never fall into credit card debt or take out a loan to fund everyday expenses like groceries or gas—or that “once-in-a-lifetime” Iceland trip. Instead, reserve debt for big financial moves that will provide you with value in the long run. While car loans are technically “bad debt” since cars depreciate in value as soon as you drive them off the lot, they are a necessity in some places. If you have to take out a car loan, make it as small as possible by paying as much as you can in cash or buying used.
• Already made this mistake? Stop adding to the bad debt you’ve accumulated, and start getting rid of it. Reign in your spending with a budget that you can stick to, which should also help you find some extra cash for your monthly repayments.
3. Paying Late—or Failing to Pay at All
• What we mean: Always make all your payments on time, and, whenever possible, in full.
• Why not: Constant late or missing payments can cost you hefty penalties, plus can affect your credit rating.
• How to avoid it: Pay at least the minimum on all your payments each month, and ideally more. Don’t trust yourself to remember? For loan payments that stay the same each month, set up automatic payments with your bank. At the very least, set up a reminder of your payment due date on your calendar.
• Already made this mistake? If you’re usually on time but are struggling this month, you might be able to waive a late fee by giving your lender a heads up. But if you’ve got a history of late payments, the only way to begin cleaning up your credit rating is to make up the payments you owe and start paying at least the minimum, on time, every month.
4. Paying Only the Minimum
• What we mean: If you can’t make your payment in full on any type of debt, pay as much as you can.
• Why not: In a recent report 42% of women reported paying just the minimum on their credit card bill. That smaller payment (whether for credit cards or any other kind of debt) can be tempting. But in the long run, it will cost you a lot of money.
• How to avoid it: Try to pay your credit card in full every month. If you need to carry a balance, keep it as low as possible. For non-credit card debt, like personal loans, pay as much as you can over the minimum to shorten the lifetime of your payments (and reduce the interest you pay).
• Already made this mistake? If you’re paying just the minimum, redo your budget so that you can increase your payments.If you aren’t finding a lot of room in your budget now, begin with whatever is possible. Then, lower your expenses and look for ways to earn extra money so you can increase your payments.