If you’re trying to get out of debt, you’re not alone. CNBC reported that after Americans in debt had paid down a collective $83 billion in credit card debt, balances are going up again.
Getting out of debt and then finding yourself back in is not an ideal situation. But if you embrace financial literacy and pay down your debt while avoiding some common mistakes, you’ll find yourself moving toward a more financially bright future.
Here are five mistakes to avoid, so you can get out of debt:
- Not Budgeting
Failing to keep a careful budget can make it more difficult to pay your loans back. This mistake is really an umbrella for several practices you should make sure you do to maximize the effectiveness of your budget:
- Manage Expenses: Part of keeping a budget means eliminating unnecessary expenses, such as subscription services, eating out too much, and entertainment. This doesn’t mean you can never go to a movie again, but minimizing the frequency of more pricy activities can help you in the long run.
- Save: Don’t forget to put money away into your savings. Follow the 80/20 rule if possible, which allocates 80% of your monthly income to bills, paying down debt, and necessities, while 20% goes toward your savings. Having money in the bank will help stabilize you if you hit hard times and need cash flow to fall back on.
- Prioritize Interest Rates: In your budget, you’ll need to work out repayment on your debts. While there are a couple of methods that are considered accelerated techniques for paying down debt, the most efficient method is the debt avalanche, which prioritizes high-interest rate loans. By using this method, you’ll save yourself money over time.
- Neglecting Financial Literacy
Studies have found that people who understand money management make better borrowing decisions. Taking the time to read more about finances can be highly beneficial to your overall debt ratio. Making an appointment with a credit counselor can provide you with more insight into money-making decisions, while a counselor can also give you information about upcoming literacy workshops and recommend literature that can help you decide your financial future in a more educated way.
- Missing Payments
Late payments can have repercussions that include your credit score taking a hit and added late fees. You also face the risk of a hike in your interest rate, and if it’s more than 30 days late you will probably start getting nagged by creditors. When you already owe and are struggling with making payments, added late fees can make it all that much harder. This means it might be time to call a credit counselor.
- Declaring Bankruptcy
If you’re in over your head and can’t make payments, you might think declaring bankruptcy is your only option. But the truth is, filing for bankruptcy can leave a lasting mark on your credit score, one that can take seven to 10 years to go away. Explore other options before you decide to go this route.
- Not Seeking Out Professional Help
If you’re thinking of bankruptcy, it’s time to seek professional help. First, call a credit counselor. A counselor will sit down with you and create a budget, and if you’re qualified, the counselor may suggest a debt management program. In a Debt Management Program, your counselor will work with your lenders to consolidate your loans into one affordable monthly payment and lower your interest rate, all so you can pay off your debt in three to five years.
The Bottom Line
While finding yourself in debt isn’t the ideal situation, you can pay it back. Following these steps will help you repay your loan without major hiccups and keep you from falling back into debt in the future.