With American consumer debt soaring and credit card interest rates reaching record highs, many individuals are looking for ways to escape the burden of debt. Paying off debt efficiently is tough; it takes time and dedication. Many individuals start off strong, only to hit stumbling blocks along the way that hinder their progress. Here are five common missteps to avoid.
1. Not Having a Debt Repayment Plan
Having a repayment plan or strategy will help you repay your debts more efficiently. Throwing money at your debt helter-skelter makes it harder to see any progress and can be disheartening.
The snowball method is the most effective since you get quick wins that motivate you to keep going. Pay off the debt with the smallest balance first to get a sense of accomplishment. Then, roll all that money into the next smallest debt. All the while, you’re continuing to make minimum payments on all your bills.
The avalanche method has you tackle debts with the highest interest rates first. You’ll save more money in the long run, but it can take longer to see a win.
It doesn’t matter which strategy you pick as long as you choose one and stick with it.
2. Avoiding Professional Help
Tackling debt alone can be overwhelming, but it doesn’t have to be. You can get professional help. Nonprofit credit counseling agencies can advise you on the right payment plan for your financial situation. They also offer debt management plans (DMP) that consolidate your payments and may lower interest rates or waive fees. A DMP is a good way to pay off debt for less and hold yourself accountable.
Another option is to seek out a debt settlement company. The company will negotiate with creditors to reduce what you owe.
Having debts forgiven through settlement is tempting, but be cautious and read the fine print. Settlement costs money and will negatively impact your credit.
Always ask questions like Is National Debt Relief legit before signing up. Review the fee structure and look for a reputable, accredited organization. The company should prioritize your financial well-being and explain all the terms and potential consequences clearly.
3. Only Paying the Minimum
Making the minimum payments on your credit cards keeps you in good standing, but it’s one of the biggest financial traps. Minimum payments are only 1% to 3% of your balance. They barely chip away at the principal; most of your money goes toward interest. This means your debt can linger for years, even decades while costing you significantly more over time
Thanks to the Card Act of 2009, your credit card statement includes a box telling you how long it will take to pay off balances and the interest you’ll accrue if you only pay the minimum. For example, it would take 11 years to pay off a $10,000 balance at a 22% APR with a 2% minimum payment and cost you thousands in interest. If you pay 4% instead, you can pay it off in only three years.
Pay more than the minimum whenever possible. Even an extra $10 a month can help you get out faster.
4. Not Changing Your Spending Habits
If you pay off debt without changing the habits that created it, you will end up back in the same place. You need to change how you spend and stop relying on credit cards.
Put the plastic away. Do not take out any more loans. Avoid using buy now, pay later services. Stick to cash and your debit card only. Every new charge adds to your total debt, increases interest, and undermines your progress.
One way to control your spending is to create a realistic budget. Track your expenses and see where you can cut back. When you receive your paycheck, pay yourself first and put that money into debt payoff or savings.
Long-term success comes from transforming your money mindset and figuring out how to live within your means.
5. Moving Debt Around and Not Paying It Off
Transferring balances from one credit card to another or taking out a new loan to pay off old ones can feel like progress, but it just shifts your debt around.
Consolidation isn’t all bad. It can help you save money on interest and avoid late payments. When done right, it can help you pay off debts more efficiently. The point is that it only works if you continue to make payments. Otherwise, you simply owe money to a different lender.
Final Thoughts
As you pay off debt, don’t neglect your emergency fund. Having a safety net can help you avoid relying on credit or payday loans when unexpected expenses pop up. Try to have three to six months of living expenses saved. If you can’t manage that, start with $1,000. Any safety net will help you steer clear of further debt.
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