Research shows that the average American in 2023 has $21,800 in personal debt, which excludes mortgages. The most common types of debt in the U.S. are student loans, auto loans, credit card debt, and mortgage debt. Another interesting aspect is that debt tends to rise around middle age, and most Americans will pay off their debt as they retire.
While most Americans are finding ways to pay off their debt and take control of their finances, a few tend to make mistakes along the way.
Here are 12 mistakes to avoid when working to get out of debt quickly.
Not Accounting for Debt in Their Budget
Most people don’t consider debt an expense they should include in their budget. Unfortunately, that means they fail to make a payment or minimum payments towards their debt. Creating a budget that accounts for your debt can help you set aside enough money to repay your debt.
It can also allow you to identify areas where you can free up more money for debt repayment.
Continuing With Your Bad Financial Habits
If you’re always convenience shopping, accumulating more credit card debt, spending more than you earn, or failing to budget, you’ll always find it challenging to get out of debt. Start changing your spending habits to free up money that can reduce your debt burden.
Not Confronting the Cause of the Debt
While avoiding discussing what caused the debt in the first place might be tempting, failing to address it could lead to more debt in the future. Addressing your prior decisions and what caused you to get into debt will help you determine if other options are available and make better decisions in the future.
Making Minimum Payments
Making minimum payments toward debt repayment is critical, but it could frustrate you if you’re dealing with high-interest debt. Minimum payments will only cover the interest, leaving you with the balance and higher overall costs. Focus on paying more than the minimum wage whenever possible to make your debt pay off quickly.
Ignoring Your Debt
It’s tempting to ignore your debt if you have other urgent expenses. However, that could harm your credit history and affect your financial goals. Creating a realistic plan and developing a debt repayment strategy will help you clear off your debt quickly and redirect the money to other essential expenses.
Failing to Negotiate on the Interest Rates
Most people do not know they can negotiate their current debt’s interest rates. Lenders are always willing to negotiate interest rates if you have a good payment history. Working with lower interest rates gives you extra money to reduce the principal balance. That allows you to pay off debt faster.
Not Exploring Debt Relief Programs
Many people in debt do not know that there are debt relief options available that can help reduce or eliminate debt. They will try to pay off the debt alone, which can be stressful, mainly if they handle high-interest debt. Explore debt management and consolidation programs that help reduce the debt burden.
Overlooking Hidden Fees
Another common mistake most people make when working to get out of debt quickly is overlooking hidden fees from their lender’s company. Financial advisors advise reading the fine print on loans and other economic agreements to avoid unexpected expenses that could increase their debt burden.
Falling for Debt Relief Scams
As a hard-pressed debtor, you may be vulnerable to debt relief scams that promise to help you get rid of debt quickly. Avoid organizations that make unrealistic promises, charge hidden fees, or have unclear terms. The Financial Counselling Association of America offers legitimate programs.
Taking on New Debt While Paying off Old Debt
Continuing to borrow while paying off old debt is a costly mistake that you should avoid. Apart from prolonging the time it takes to pay off the debt, taking on new debt means putting more money into debt repayment instead of a savings account or investments.
If you’re stuck financially and find it difficult to get out of debt, it’s best to seek professional help to determine the available debt relief options.
Trying to Pay Off Multiple Debts at Once
Trying to pay off multiple debts at once might seem wise, but it can be stressful if you don’t have the resources. When paying off your debt, you need to focus on your interest rates, type of debt, investment returns, and financial goals.
Financial experts advise using the debt snowball method, which entails focusing on the smallest debt before moving on to the biggest. Paying off the smallest debt motivates you to pay off the rest and ensures that the high-interest rates do not overburden you.
Not Seeking Professional Help With Debt
Most Americans opt to pay off their debt without consulting a professional. While this strategy might work, it often fails, leaving you frustrated and stressed. Working with a professional allows you to create a practical debt payment plan. You also learn about consolidation options, budgeting tips, balance transfers, etc.
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