Mistakes are part of life, and you have to cherish them because there are lessons to be learned from them. But, when you’re talking about money, you must avoid blunders as much as possible.
If you’re in debt, for instance, you have to make sure that you pay it off on time consistently. You should have a budget plan to ensure that you don’t miss payments and you’re not costing yourself more money than what you’re supposed to be paying.
It doesn’t matter if you’re paying a personal loan or a line of credit (learn the difference between personal loans vs credit line here). What matters is that you’re paying it right and you don’t commit this list of mistakes below.
Mistake 1: No plan and strategy
You might think that paying back a loan or a credit card balance is an easy undertaking. However, if you fail to plan and strategize your debt payment, there will be a chance that you spend more money without even realizing it.
Planning your debt repayment is an excellent way to pay what you owe faster, motivate you to make consistent payments, and lower your total debt payment.
For you to develop an effective plan and strategy, it’s crucial to understand your debt obligation and financial circumstances. Make sure to know the total amount of what you owe, the interest rate, and your monthly income. Consider these factors, and you’ll have a clearer picture of the monthly debt payment that you can afford while still having sufficient money for other expenses.
If you have multiple debts, you can also develop time-tested strategies to lessen what you need to pay. For example, you can use the snowball method and the avalanche method for that purpose.
The snowball method is a process of paying off debts with the smallest amounts first, keeping you motivated to pay as the debts are gradually paid. The avalanche method, on the other hand, is more focused on paying down your high-interest debts first while you make minimum payments on other debt obligations, saving you significant cash on interests.
Mistake 2: Using credit cards to pay off debts
Don’t use your credit cards to pay your current debt obligations because you’re just loading more debt when doing it. As far as we want to avoid sounding dark and grim here, but paying your debts using your credit cards is like burying your own debt grave.
Instead, get rid of your debts by paying them off with cash. In such a case, look at the first tip (having a plan and strategy) to achieve that goal. If there comes the temptation to use your credit cards, put them in a safe, or ask a family member or relative to hide them in a place where you couldn’t find them.
Mistake 3: Getting new loans to pay off debts
Most people who have several debts to pay apply for a debt consolidation loan. It might be an appealing strategy to take because you’ll be paying a single payment every month. There’s also the possibility of getting a favourable interest rate on the new loan.
However, there are downsides to getting a debt consolidation loan to get rid of your other debts. For instance, it’s hard to get approved for a low-interest rate loan, especially if your credit score is not that good due to not making consistent payments on your past debt obligations.
Moreover, consolidating your debts doesn’t really lower the total debt amount you have to pay. Even if the interest rate is lower, you’ll still be paying the same debt amount.
Mistake 4: Failing to automate debt repayment
Not automating your debt repayment is a mistake that you must avoid when paying off debt. Most people fail to make debt payments because they forget the repayment schedule or their debts have different repayment dates.
Of course, missing payments result in fees and penalties, which add up to the costs you have to pay. So, you should automate your debt repayment to remind you always about your debt repayment schedules.
Mistake 5: Not understanding the causes of the problem
You have to know and understand the reasons why you’re in a debt predicament. If you fail to take into account and understand your current situation, there are chances that you won’t learn from it and you’ll struggle with debts again in the future.
One of the causes people have debt problems is that they make purchases that their income can’t afford. As such, they use their credit cards or take out loans. Another reason is that they don’t have an emergency fund, so when sudden expenses rear their head, they will use the money they don’t have to cover such expenses.
Now you know the common mistakes when paying off debt. Make sure to avoid them as much as possible to prevent missing debt payments and paying more than what you can afford. Also, you have to know the underlying causes of why you have a debt to avoid having debt problems in the future.