Have you decided that now is the time you will pay off your debt once and for all? Now, be honest. How many times have you decided that now is the time you will pay off debt once and for all? You may have the best intentions when it comes to paying off your debt, but if find yourself in the same position or trying to pay them off with no success, you could be making some costly mistakes.
You can’t change the past, and you can’t take anything back, but you can improve for your next debt pay-off go-round. I’m going to share 6 mistakes to avoid when paying off your debt for good. These mistakes are common to most people (even to me during my first debt pay-off period). I want you to understand what could be holding you back, so you can work around it. Don’t make these mistakes any more, and you can have that debt-free life.
Mistake #1: Failing to Create a Budget
If you are serious about paying off your debt, you need to have a real understanding of your financial situation. Failing to create a budget before you create a debt repayment plan can be an expensive mistake. Not only do you fail to understand what you can *reasonably afford to pay towards debt (I say reasonably because unrealistic debt payments only hurt your situation), but you fail to ensure your living expenses are taken care of before paying your debt.
Before you create a debt repayment strategy, create a budget that specifies your bills, living expenses, discretionary spending and savings. After all of those expenses come out, what are you left with? Whatever that leftover amount is, it should be used to pay down your debt. If the number isn’t much at all, see where you can cut back. You may need to increase your income as well.
Mistake #2: Paying off Multiple Debts at the Same Time
I mentioned creating a debt repayment strategy, and it’s a very important part of the debt repayment process. If you don’t have a game plan for paying off your debts, you could spend more time and money than necessary. One of the most popular methods of diligently paying down debt is the Snowball method. Using this method means you put all extra money towards one debt at a time, while paying the minimum on your other debts.
The snowball method is one of the fastest ways to pay down your debt, if you follow it. If you create a snowball method plan but spread extra money to multiple debts, you are defeating the purpose. Make sure you focus on a single debt at a time (while paying the minimum payments on your other debts), so you can make the most progress. I highly recommend you focus on the debt that has the highest minimum payment first. Once that debt is knocked out, the amount you were putting towards it should go to the next debt.
Mistake #3: Continuing to Accumulate Debt
Another big mistake that people (including myself, in the past) make when paying off debt is continuing to use debt for purchases. This is where your budget comes in handy. If you are following your budget, there should be no need to use debt for purchases, because everything should be accounted for with your income. If you failed to budget certain expenses, you will need to cut back spending in other areas to ensure you don’t have to use debt.
When you continue to use debt while you are paying it off, you are cancelling out the progress you do make. Also, you are prolonging your debt-free life. When you make the decision to pay off your debts once and for all, put all forms of credit away. You can no longer use them. You will have to find other means of paying for things that aren’t in your budget. Start driving for Uber. Start a blog. Get a part-time job. Do what you need to do, just don’t accumulate debt.
Mistake #4: Not Having Anything Saved Before Tackling Debt
Let’s say you’ve done a great job of not accumulating debt for things you don’t need. But, what if your car breaks down? You need your car to get to work to make the money that will be paying off your debts. This is where having a small savings for emergencies or unexpected expenses can change your life.
Imagine that your car broke down and it would cost about $500 to fix. If you had a small emergency fund (at least $1000), you can continue to pay off your debt and fix your car (without using credit). Life would move on. On the other hand, if you were putting all of your extra funds to debt and didn’t have a savings in place, what option would you have for fixing your car? You would likely need to use a credit card – which would kill all the pay-off progress you had previously made.
Moral of the story? Before tackling your debt head on, make sure you have a small savings of at least $1000 in place. You may never need it, but if you do, at least you have it.
Mistake #5: Using Promos to Transfer Balances, then Racking Up Debt Again
I’ve played the balance transfer game a couple of times in my life. The right way to do it requires two parts: 1) Transfer high-interest debt on to the accounts that have low-interest promotions and 2) Pay off the new debt before the promotion ends. Easy enough right? Wrong.
According to a study done by Dave Ramsey, 78% of people who consolidate debt rack it right back up. The same applies to balance transfers. You transfer the balance from one card to another, leaving a card with $0 balance. That $0 balance card makes you think you are in a better position than before the transfer, so you use that $0 balance card. Now, you have more debt than what you started with.
If you are going to use promotions as part of your debt repayment plan, make sure that you hide the card that no longer has the balance. If you continue to use it, you will have more debt that needs to be paid down. Don’t put yourself in a position to fail. If knowing you have interest motivates you to pay off your debts faster, steer clear of promotions.
Mistake #6: Closing Accounts When They’re Paid Off
As you move a long in your debt repayment journey, you will pay off credit accounts. The balance will be $0 and it will be amazing. Don’t jump the gun and close these accounts just because they are paid off. As I mentioned earlier, hide the cards so they can never be used. Closing the accounts may seem like the right thing to do, but it’s actually affecting your credit score.
Since the average length of credit history accounts for 10% of your score, closing your accounts after they are paid off means those closed accounts are no longer generating history. They are closed, so the length they have been open stops immediately. You want your credit score to benefit from your debt pay off, so keeping your accounts open at the $0 balance mark is the best way to go.
Related: How to Tackle Your Debt Head On
I am by no means saying that paying off your debt once and for all is an easy task. What I am saying is that you should learn from these 6 mistakes to avoid when paying off debt. Don’t let these mistakes slow your progress. You can get there, and doing it the right way will get you there faster. Have you made any of the 6 mistakes above? How did you bounce back? Which mistake costed you the most? Share your debt repayment experiences, tips and feedback by leaving a comment below!
The CGS Team