Not all debt is created equal. With that being said, there is no one-size-fits-all approach to managing your debt and avoiding excessive interest, fees and other penalties that could result if not handled properly.
Here are five mistakes consumers commonly make with their debt (and ways to avoid them).
1. Depleting Your Emergency Fund
If you have a substantial amount of cash in your savings account, allocating a vast majority of it to get out of debt may seem like the wise thing to do. However, the problem with this approach is that it fails to get to the root of the problem. The ultimate goal should be to get out of debt and stay out of debt, and not simply write a fat check to serve as a temporary patch. It is more sensible to jump-start your management efforts and cut costs elsewhere in your spending plan because emptying out your emergency fund can mean even greater debt if an emergency arises and you do not have an adequate amount of cash on-hand to cover the costs.
2. Having No Plan of Action
Taking a lax approach to your debt is a recipe for disaster. You may eventually achieve your goal, but the process may be lengthy and tedious. Just imagine a college student who randomly takes courses that appeal to them without ever looking at their transcript to see what’s needed to graduate.
Save yourself the headache and devise a detailed debt repayment plan that incorporates your financial goals.
3. Getting Caught in the Minimum-Payment Trap
Making the minimum payment each month may give you more flexibility in your budget, but you more than likely will never get out of debt. In most instances, particularly if the outstanding balance is high, the minimum payment may only cover interest (or not much more), leaving you with an untouched principal balance.
Instead of making this mistake, allocate as much money as possible toward your monthly payment, even if the amount is way more than the minimum, to ensure that your payment efforts are not in vain.
4. Robbing Peter to Pay Paul
Advancing cash from one debt source to another solely for the purpose of making your monthly payments may cause you to end up in a bigger financial crunch than you initially bargained for. If your financial situation is dire and you‘re robbing Peter to pay Paul just to make timely payments, reach out to the creditors and request that they grant you some sort of temporary relief until you are able to sort things out. In addition, refrain from using any sort of financing to pay for purchases unless it is absolutely necessary.
5. Ignoring Statements and Credit Reports
Both your statements and credit reports paint a picture of where you stand in terms of your debt obligations. Ignoring these documents can be very costly and time-consuming down the road if inaccuracies exist because errors that are not promptly reported may be more difficult to dispute.
To avoid these issues, immediately review your statements each month when they arrive to verify their accuracy. If discrepancies exist, report them as soon as possible to the creditor so that the issue can be resolved before the inaccurate information is reported to the three credit bureaus. Also, review your credit report at least once every four months for mistakes – you can get them for free once a year. You can also monitor your credit once a month for free using the Credit Report Card.