6 Mistakes People Often Make When Paying Off Debts
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Paying off debts is essential for a stable financial life.
It helps you to save money on credit card interests and late fees. It helps you to improve your credit score gradually. And most importantly, it helps you to avoid lawsuits and pesky debt collection calls.
But while it’s important to eliminate debts, the process is not that easy, especially when you make loads of mistakes.
Mistakes are common while paying off debts.
Some of these mistakes can make it harder for you to be debt-free. Make sure you don’t commit these mistakes in your journey to financial independence.
Here are 6 mistakes people make when paying off debts.
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1. Not having a proper debt repayment strategy
Setting a goal to pay off debts is not sufficient.
Without a proper strategy, it’s impossible to clear your debts. Making sporadic payments to creditors won’t help. You have to devise a clear strategy to pay off debts one by one.
For instance, calculate how much you owe to your creditors. Without knowing how much debt you have accumulated, it’s impossible to create a payoff plan.
Once you have noted down how much you owe, think how you want to get out of debt. Do you want to consolidate credit cards into one payment plan? Do you want to settle your debts? Evaluate the risks and rewards before making a decision.
Remember, you may have to create separate plans based on the types of debts you have.
For instance, if you have secured debts like a mortgage, then you won’t be able to settle it. You have to either refinance it or go for a loan modification. Again, if you have both secured and unsecured debts, then you need to decide which ones should be eliminated first.
A mortgage has low-interest rates. Plus, you can get tax deductions for the interest paid to lenders. The repayment term is also long. However, credit cards have high-interest rates. The billing cycle is also short. So, it makes sense to get rid of them first.
Some people create a debt repayment plan and still fail to get rid of debt.
This happens when they choose the wrong payoff plan. For instance, taking out a long-term debt consolidation loan to pay off credit card bills.
People opt for this loan due to the low-interest rate but fail to analyze from the long-term perspective. When the repayment period stretches over several years, people end up spending more to get out of credit card debt.
This is another mistake to avoid when paying off debt.
2. Spending money just like before
Overspending is the reason why you’re in debt.
If you keep on spending money just like before, then you would never be out of debt. You have to stop making impulsive purchases. You have to stop using credit cards for buying whatever you want.
Remember, your debts are only symptoms. Your reckless spending habits have pushed you toward debts. Unless you change your spending habits, nothing will change.
Fresh debts will be back in your life soon after paying off your existing debts.
Create a budget to track how much you spend every month. Stop using your credit cards at the department stores. Use cash to keep your expenses under control.
Many people send payments to debt relief companies every month but fail to get financial independence. The reason is they don’t work on the causes. When your stomach is upset, you should have a light diet and take the prescribed medication.
However, if you just take the medication and continue to eat spicy foods, then your digestive system would never heal.
Recommended – – – > How to Start a Budget You Actually Stick To
3. Not creating an emergency fund
Emergency expenses may emerge from unchartered territories suddenly.
Unless you have an emergency fund, you’ll have to stall the debt repayment process and postpone your financial independence. A sudden medical bill can force you to use credit cards to pay it off and throw you into financial problems yet again.
It would spoil all your efforts.
Set aside money for the unforeseen expenses so that you don’t have to borrow money from anyone. It’s hard but try to save a small amount and build your emergency fund gradually.
Recommended – – – > How to Create a Super Simple Financial Plan at Any Age
4. Paying only the minimum amount
Making the minimum monthly payments is the biggest mistake people make when paying off debt.
It may take decades to pay off the entire debt. This is because minimum payments hardly cover the interest rate and a tiny portion goes toward the principal amount.
You should always try to make extra payments on your debts because that will help you to be debt-free soon.
Whenever you get a bonus or a pay hike, you should use it to make extra payments to creditors. After months of hard work, you may feel like enjoying the bonus. You may feel like going for a shopping-spree and giving yourself an expensive item.
However, when you’re in debt, you should avoid buying costly items. Give yourself a small treat and use the rest of the money to pay off debts.
5. Not checking the progress report
Bob was doing everything for getting out of debt. He was making monthly payments to debt negotiators every month. He was saving money in his emergency fund. He was not spending dollars like a millionaire. Still, he was not getting out of debt.
Do you know why?
It’s because he never tracked his progress. He never checked if the debt negotiators were sending payments to his creditors. He never checked his credit report to know the status of his accounts.
The debt negotiators didn’t disburse payments to his creditors. They were all fraudsters. As a result, Bob’s debts were never paid.
If you don’t want to be another Bob, then ask the debt negotiators to show you the progress report.
Don’t believe in verbal words. Ask them to show you papers; something substantial. Check your credit report and see what your creditors are reporting there. Are they updating your account status accurately?
If you’re working with your creditors directly, then find out if your current repayment is good. Is it helping to put a dent in your principal amount?
6. Not making the proper research
People often start making payments without checking the validity of their debts.
This is a big error. People get so scared by the collection calls that they make payments immediately. They don’t verify the debt amount or check the statute of limitations period of the state. As such, they end up paying off invalid debts.
You should always research debt collectors to validate debts in writing.
Check how much you owe and to whom. Next, check the statute of limitations period in your state. If the statute of limitations period has expired, then you can’t get sued for payments.
However, the debt will be there in your credit report for 7 years.
People often get emotional when they are in debt. They feel embarrassed to discuss with anyone about their debt problems.
This is another big mistake done by people while paying off debts. They often make emotional decisions. When it comes to money, emotion has nothing to do with it.
Only practical decisions matter.
Sometimes, people are so overwhelmed with debt that they fail to tackle debts head-on. This creates unnecessary problems.