If you’re feeling overwhelmed about paying off debt, you are not alone. Credit card debt and other debt is a major problem for many Americans.
NBC News reported that the total debt of Americans hit a record high of $13.5 trillion in the third quarter of 2018. Total household debt, which includes $9.1 trillion in mortgages, was $837 billion higher than its peak in 2008 when the recession began. Consumer debt is increasing as well.
The Wall Street Journal reported that “consumer debt, including credit cards, auto loans, student loans, and personal loans is on pace to top $4 trillion in 2019.” If you don’t face your debt head-on with a careful plan of elimination, you may find yourself in an even deeper hole at the end of the year. That’s what typically happens when you just ignore a problem. Are you making any of the mistakes below?
Seven mistakes you’re making when it comes to paying off debt
-
You just don’t know how much debt you really have.
When was the last time you sat down and took a long hard look at your finances? It’s probably been quite awhile or perhaps it was the last time you needed a large sum of money. Most people have no idea of the total amount of debt they have. You may have charged that large sum you needed on your credit card or took a high-interest loan as a temporary fix. Problem is, as we said, the fix was only temporary. Although your money problems went away for a while, you’re now just deeper in debt. Many people just think of debt in terms of their mortgage and other large loans, such as a car loan. They don’t take the time to add up all debt, such as credit card balances, outstanding medical bills, lingering student loan debt, and smaller personal loans. If you want a clear picture of your actual debt, you really need to total everything you owe. If you don’t have the full picture, you won’t be able to develop a smart plan to tackle the problem.
-
You have no real budget.
You just spend, spend, and spend some more with no idea of how much you need to pay bills each month. Shopaholic? It’s not your “fun” that’s suffering, but rather it’s your monthly bill and debt payments. They’re paid last with whatever is left over from your pay and it’s not much. You’re racking up interest and paying late fees. Without a budget and the prioritizing of debt payment in that budget, you will never get your head above water.
-
You only make minimum payments.
We’ve all been there! Your budget can only be stretched so far. If you’re making the absolute minimum payments on everything to try to scape by each month it’s a recipe for debt disaster. If you have several high-interest credit cards with high balances and you’re only making the minimum payments on each, it can realistically take you 5 to 10 years or more to pay off the balances. That’s if you don’t continue to add to your balances as your trying to pay them down. For instance, if your credit card debt totals $7,500, the interest rate is 18% and you are making minimum payments of $150, it will take you 94 months to pay off your debt. You will also have paid $6,466 in interest during that time. If you would just double your payments to $300 or just 4% of the total debt, you can pay off the balance in 32 months. By increasing the payments, you will cut your interest payment to $1,970. If you can consolidate your debt into a lower interest debt consolidation loan or with a low-interest credit card balance transfer special, you can save even more. Choice One Community Credit Union offers special balance transfer rates and both Platinum and Classic VISA Credit Card options. When considering debt consolidation in the form of a loan or credit card balance transfer, be sure to shop around for the best rates and terms. Say you take that same $7,500 in credit card debt and refinance it in the form of a consolidation loan or credit card balance transfer at a lower interest rate of 8%. That will enable you to pay it off in 28 months, paying total interest of $810. That’s a big saving in interest and a faster path to paying off your debt. Again, this would mean not incurring any additional debt as you’re paying down your balance.
-
You have very high-interest debt.
Just as we’ve talked about above, the higher your interest rate, the more money you’ll end up paying to pay off your debt. Again, consolidating debt into a lower interest loan can help if you focus on paying off your balance.
-
You simply have more debt than you can handle.
That extravagant house seemed like a good idea and now the mortgage is eating up way too much of your budget. You are buried in student loan debt. You bought a car you really couldn’t afford. You went hog wild over the holidays and charged up over your credit cards. Sound familiar? These are all typical scenarios. Now, reality sets in and you understand you need to do something quickly before things get any worse. There are several solutions you can consider. Debt consolidation as we mentioned above or perhaps refinancing your auto loan or your mortgage. You may be able to find a better interest rate or refinance for a longer term and help you ease the burden of those high payments on your budget.
-
You have bad spending habits.
While you are concerned about your debt, you just can’t seem to break the spending cycle. You start to get a handle on your credit card debt and get balances down a bit, only to charge them right back up again. You’ve already blown your entertainment budget for the month, yet you still go out to dinners with friends. If you don’t develop some self-control you will never get out of debt. It’s time to make a choice. Give up some luxuries now and focus on paying off debt or continue to get yourself deeper in debt and prolong the stress of never getting caught up financially.
-
You have no emergency savings.
This is a biggie. Many people have absolutely no emergency savings. Lack of putting aside an emergency fund can lead you to charge up credit cards or desperately borrowing at too high an interest rate. Let’s face it, folks, when that furnace goes in the middle of January or you have an unexpected medical emergency and a large insurance deductible, you will be searching for money. Start now by direct depositing of a portion of every pay into a dedicated emergency savings. Every little bit adds up. Planning and saving for your emergency fund now can prevent you from suffering a financial setback later.
If you find that you’re making any or all of the above mistakes, we hope you will make an effort to make some changes and break the cycle of debt. Want to learn more? Read the Choice One Community Credit Union blog “8 Strategies to Pay Down Debt.”