Do a quick Google search of something like “pay down debt” or “debt advice” or “credit card payoff” and one thing becomes very clear: Just about everyone has an opinion about the best way to pay down debt. Some folks are huge proponents of the snowball method; others are staunch believers in tackling the debt with the highest interest rate first – no matter what.
Most debt repayment methods have their pros and cons – and it would take more than a single blog post to examine each method in depth. But while there are hundreds of opinions about how to pay down your debt, there are a few things that nearly everyone can agree on.
No matter which debt repayment method you prefer, you’ll want to avoid these common mistakes:
- Getting stuck in a pay-spend-repeat cycle. You make a credit card payment – a fairly large one – and then a few days later, you’re flat broke . . . so you end up using your credit card to buy groceries or gas or other necessities. It’s easy to get stuck in an endless loop like this – especially if you’re dealing with a substantial credit card balance. It’s disheartening, too: no matter how much cash you throw at that balance, it never seems to shrink.
Does this cycle sound familiar? The good news is, there’s a way to stop the cycle. The bad news is, you’ll need to address another, related debt repayment problem, which leads us to our next debt repayment mistake . . .
- You aren’t changing your spending habits. It used to surprise me how many folks pay off thousands of dollars in credit card debt, only to rack it back up again. By this point, though, I’ve come to see this as commonplace. And I’ve also come to understand exactly why it happens. It’s pretty simple, actually: Although these folks have managed to pay off their supersized credit card balances, they haven’t addressed any of the behaviors or patterns that got them into debt in the first place.
If you want to get out of debt – and more importantly, if you want to stay out of debt for good – you’ll need to look at more than your outstanding balance. You’ll need to look at your spending. Where is your debt coming from? Are you making impulse purchases? Keeping up with the Joneses? Are you overspending on entertainment or fancy dinners?
Spending isn’t the only roadblock to debt repayment, though.
- You aren’t budgeting. If you want to pay down debt, save money, and get your finances back on track, you have to make a budget. It doesn’t even matter how you create a budget – you can use a fancy smartphone app or an Excel spreadsheet, or you can even use pen and paper. What does matter is that you create a budget that takes all of your expenses into account, from groceries and gas to rent and utilities. And if you want to break the cycle of debt, your budget should also include credit card payments and savings.
- Not taking advantage of balance transfers. Most balance transfer offers give you super-low interest rates for a set amount of time (and many offer zero percent). This can give you a leg up if you’re battling a sky-high interest rate. The right balance transfer, used responsibly, can vastly reduce the amount of time it takes to pay off your debt.
Of course, there are a couple of things to keep in mind before applying for a balance transfer. Balance transfers typically come with fees, so you’ll need to factor that in when deciding if a balance transfer is right for you. You should also consider the length of the introductory rate and the amount of time you think it will take you to pay your balance. And, most importantly, you need to make sure that you don’t use your balance transfer as an excuse to make more credit card purchases.
- Only paying the minimum payments. This is a huge mistake – if you want to pay down your debt and avoid paying hundreds – or even thousands – of dollars in interest, you have to pay more than the minimum monthly payment. In fact, you should be paying as much as you can afford to pay.
- Using your card as an emergency fund. I know – the thought of setting up an emergency fund in addition to paying off your credit card debt can seem like a daunting task. But relying on credit cards as a safety net only leads to more debt problems down the road. If you don’t have an emergency fund, start building one today. Even if you can only put aside $20 or $30 a paycheck, you’ll be surprised how quickly it adds up.
- Not asking for a better interest rate. Don’t forget that your credit card company wants you to pay your balance. When you’re having problems with credit card debt, it’s easy to start thinking of your credit card company as an adversary – but the truth is, they want you to make your payments and they’re probably willing to work with you. If you’ve been making your payments on time, you might be surprised how easy it is to get a lower interest rate just by calling and asking for one. And if you get turned down? No big deal. At least you tried, right?
- Closing a card once you pay it off. This is almost always a mistake. Your credit score is based in part on your ratio of available credit to credit used. Closing a card lowers your available credit, which can be especially bad if you’re carrying a balance on other cards. My advice: Keep the card open, even if you don’t intend to use it.
Of course, there’s more to debt repayment than simply avoiding these mistakes. If you need advice about debt, budgeting, or responsible credit card use, we’re here for you. Contact the Debt Guru team today for a free debt consultation.