Debt management is a major concern for many people, with the average American now carrying more than $65,000 in debt, according to recent data from the Federal Reserve’s Survey of Consumer Finances. And while there’s nothing wrong with borrowing money in order to invest in a house, a vehicle or an education, too much debt can lead to serious financial problems – so if you’re running late on bills, unable to save money or at risk of damaging your credit score, it’s time to think about getting out of debt.
Of course, planning to get out of debt and actually doing it are two different things. To help you achieve your debt-reduction goals, here are five common mistakes people make when trying to recover from debt – and how you can avoid them.
Mistake #1: Closing a Credit Card Account
Paying off your credit card balance is an excellent way to reduce debt – but that doesn’t mean you should close your account once it’s paid off. Cancelling a credit card, especially one with a high limit, can actually have a negative effect on your credit score. If you absolutely do need to cancel a credit card, perhaps to avoid high annual fees, wait until you’ve paid off balances on other credit cards and loans. That way, your credit utilization ratio won’t be as strongly affected by the closure of one account.
Mistake #2: Not Building a Budget
A budget is a fantastic tool for anyone, and this is doubly true if you’re getting out of debt. Now more than ever, you need complete clarity on how much money is coming in and going out of your various accounts. A good way to start building your budget is to simply track your spending for a month. You may be surprised to find that small expenses are adding up in a big way, which can be fantastic motivation to create a budget, lower your expenses, and use the extra savings to pay down debt.
Mistake #3: Prioritizing Other Spending
When you become accustomed to living with debt, it’s tempting to put debt management at the bottom of your to-do list. Don’t do it! Make getting out of debt a top priority, because staying in debt usually means more money spent in the long run thanks to interest payments. The quicker you can pay off your debt, the better – that way you will save money on interest, improve your credit score, and reduce the stress of living in the red.
Mistake #4: Holding On to Old Habits
Some debt is manageable and expected; for example, debt related to investing in a home or an education. In these cases, your debt has enabled you to acquire a necessary asset. But some debt is due to bad spending practices – and in order to erase it once and for all, you must actively eliminate the habits that got you into debt in the first place. Only you can say for sure which spending habits you need to kick, so think about this carefully. You might need to cut out large electronics purchases, stop spending online, or leave the credit card at home when you’re out for a night on the town.
Mistake #5: Trying to Do Too Much
Getting out of debt is a serious priority, but don’t institute a debt management plan so extreme that you’re basically setting yourself up to fail. It’s ok to keep up some discretionary spending even if you are getting out in debt; the occasional dinner with friends, a visit to the cinema, or a new pair of mittens. Again, this is where a good budget really comes in handy. If you can plan ahead of expenses like a fun night out, you’ll actually spend less than if you get caught up in an impromptu “go wild!” moment without any strategy for how much you’re prepared to spend. You can pay down debt and budget for fun – they’re not mutually exclusive.
Getting out of debt can feel like an insurmountable challenge, but as with everything financial, it’s all about taking things one step at a time. Simply making the decision to focus on debt management is a fantastic start, and if you can avoid the common mistakes people make when paying off their debt, you’ll be well on your way to a debt-free future.