Taking the initiative to formulate a solid plan and pull yourself out of debt is a great first start to wresting control of your finances, but there are pitfalls along the way that you’ll want to avoid. Not only can certain mistakes set you back, but once you’ve paid off your debt, you could find yourself back in the same boat if you’re not careful.
Here are five mistakes to avoid when working to get out of debt.
1. Fail to Become More Financially Literate
Citing a Bankrate survey, CNBC reported that more than half of Americans can’t cover a $1,000 emergency expense with savings, while 20% of employees run out of money before their next paycheck. This is why financial literacy is important. Understanding how to manage your money will help you make better choices for your future.
One way to become more financially literate? Talk to a credit counselor.
Not only is it their job to help people gain a deeper understanding of how their finances work, but they often have information on upcoming financial literacy workshops. They'll recommend literature and other resources you can utilize as you work to become more financially independent.
2. Not Budgeting
In the most basic sense, people know they should have a budget in place or need to budget better, but budgeting is an acquired skill that can take time to hone. If you’re in debt and trying to get out, a budget is vital to that goal.
Budgeting can help you see where your money goes each month, giving you a better sense of how you’re spending. It also allows you to decide which expenses can be eliminated, so you can free up cash flow and direct it toward savings or paying down debt. A big part of budgeting is making sure that you’ve chosen a repayment method that works. Two different types of methods include the debt snowball, which means you focus on paying off the debt that’s the smallest (while making minimum payments on other debts), and the debt avalanche, which focuses on paying down your loan with the highest interest rate first.
Either way, a budget in place will help you put a plan into action.
3. Making Late Payments
No one likes phone calls from creditors. But when you miss a payment, not only will your credit score take a hit, you’ll most likely incur late fees on top of the amount you already owe. Even if you can only afford the minimum payment, which isn’t ideal, do so—making a minimum payment is better than making no payment. However, if you’re struggling to make even the minimum payment, or if you’d like to be able to start paying more, it might be time to talk to a credit counselor.
4. Closing Your Credit Cards
Closing you credit cards might seem like the right thing to do. Afterall, they’re what got you into trouble in the first place. And yet, closing your credit cards isn’t necessarily a good thing. This doesn’t mean you should use them, however. You can cut them up and throw them away, but by allowing them to stay open you will continue to show lenders that you have a long history of credit, which will allow you to take out loans, get a mortgage, buy a car, and more.
5. Neglecting to Seek Credit Counseling
There comes a point when you might need help—and that’s okay. The worst thing you can do is try to do it on your own when you feel like you might be sinking. Making an appointment with a credit counselor can help you formulate a plan, a budget, and a way out of debt. If you’re eligible, a counselor might recommend you enroll in a debt management plan, which will ultimately help you pay off your debt in three to five years. The counselor will work with your lenders to reduce your interest rate and consolidate your loans into one affordable monthly payment.
If you need help, get help. You’ll find yourself on a better and more efficient path to financial well-being.