The credit card debt level has crossed $1 trillion in America, up 6.2% from the previous year.
The average American pays $1,254 in credit card interest charges every year, has an average monthly balance of $9,600.
Millions of consumers are in credit card debt. And the numbers are expected to increase this year and into the foreseeable future. If you’re one of those unfortunate people who are already in credit card debt and want to get out of it, then here are 5 deadly mistakes to avoid.
Before we dive into the mistakes people make when they’re trying to get out of debt, please watch this 90 second Rachel Cruze video. She does an excellent job of explaining her thoughts on debt management:
11 Costly Mistakes to Avoid When You Want to Get Out of Debt
1. Trying to Get Out of Debt Without Seeking Outside Help:
It is true that some people can negotiate and pay off debt themselves. But there are also some people who don’t have requisite debt negotiation skills. They need professional help. If these people try to negotiate with creditors or debt collectors on their own, then the following things may happen:
- They may fail to grab a good debt settlement offer.
- They may fail to convince creditors to settle the debt.
If you don’t have good negotiation skills, then approach a debt relief company since they can give you a better payment plan. Moreover, they can help to waive off late fees and penalties.
As an aside, and as it relates to medical bills, the same rule applies. You can negotiate with the hospital or doctor to reduce your bill.
2. Not Reading the Terms and Conditions of the Debt Company
If you don’t read the agreement properly, the terms and conditions, then you can be in big trouble and could be making a big mistake.
A bad debt relief company may charge outrageous fees and you can do nothing before it is too late.
Apart from reading the terms and conditions, check the affiliation of the debt relief company as well to know if you’re handing over the money in the right hands. You’re already in a financial crisis. I guess you would not want to worsen your situation.
3. Blindly Trusting Your Credit Report:
Some debtors start negotiating with debt collectors after finding a delinquent account on their credit report. They don’t even check if the debt is valid. This is a major mistake since there are several instances where debt collectors have listed an invalid or paid off account in the credit report. Plus, credit card inaccuracies are also rampant.
If you find any new delinquent accounts in your credit report, then your first job will be to send a debt validation letter via certified mail to the debt collector. If the debt gets validated properly, then negotiate with the collector. But if you aren’t satisfied or the collector fails to validate the debt, then send a cease and desist letter to the debt collector. Don’t pay money to the debt collection agency.
You can also dispute the account with the credit reporting agency. If they don’t give you a reply or verify the debt, then you can ask them to remove it from your credit report.
4. Not Developing a Budget Plan:
A realistic budget plan will help you to get out of debt, and stay out of debt. Not having a budget plan is a mistake.
A practical budget can help you cover all your expenses – food, clothing, mortgage, education, insurance, etc. It will help you cover your living expenses when you’re busy paying off your debts.
If you use credit cards to buy groceries, then you’re incurring fresh debt. There is no logic behind making additional payments towards your debts.
Set a realistic budget, and manage your monthly expenses to that budget.
5. Set up a Separate Account to be Used for Saving
Set up another saving bucket, perhaps a savings account, and allocate a certain small amount to your saving bucket on a monthly basis. Yes, you need to pay down the debt, but, even saving $10 a month, and seeing the balance on your savings account increase every month, will start a new saving habit that you should make sure continue even after all of your credit card debts are paid.
6. Not Fixing Your Bad Spending Habits
Your poor spending habits got you into the debt problem in the first place. You’re spending more then you’re making, and as long as you continue to do that, the debt cycle will continue to perpetuate itself.
In this blog post, The Rich vs The Poverty Mindset and The Psychology Stopping You From Becoming Rich, I wrote that it’s likely that your spending habits, and the fact that you live paycheck to paycheck, is the result of having a poverty mindset and not a wealth-creating mindset. Your subconscious is not allowing you to grow wealth and abundance.
As long as you continue to spend more then you make, you will never get out of debt, and youd credit card debt will continue to soar.
7. Trying to Tackle Too Many Debts at Once
It can almost become overwhelming if you see too many accounts with too much debt on all of these accounts. Trying to tackle everything all at the same time is a mistake.
Instead of paying off a few dollars from each debt every month, try to pay down one debt, in full, at a time. Start with the largest debt first, and then move to the second largest, third-largest, and so on. You can read this article for more information: What is a Debt Snowball and How Can it Help You Get Out of Debt?
You should also be careful, and aware, of the debts that are incurring the highest interest charges, as those should be reviewed, and paid first.
Many of the credit card companies charge 18%, and some more, in interest charges. Those debts can add up fast.
8. Not Setting up an Emergency Savings Plan
Just as we reviewed setting up a savings account, and depositing even a small nominal amount in the savings account every month, it’s equally as important to have an emergency savings plan, and a savings account set up. Not having an emergency account is a mistake.
An emergency fund is important to the extent that you lose your job, require emergency medical care, dental care, or for many other reasons. It certainly helps alleviate the pressure if you know that you can cover four to six months of your monthly expenses without having to dip into your retirement account.
9. Not Choosing the Right Plan:
Debt settlement, debt management, and debt consolidation are constantly advertised. But do you really need them?
If you have a minor debt problem, you can easily solve it by using a smart budgeting strategy.
You may not need to enroll in a debt management or a settlement program.
Some debt relief companies may guide you in the wrong direction just to make money. If you follow their financial advice blindly, you’ll be in trouble. So, always ask questions to know the difference between these programs. Read articles to clarify your doubts. Share your problem in financial forums. Compare the pros and cons of these programs to make the best decision.
10. Waiting too Long to Take Action
Putting the debt problem off until tomorrow won’t help solve your debt problem, it will only make it worse, more stressful on you and your family, and is probably the biggest debt mistake.
The sooner you start planning, and paying off your debt, the sooner the interest charges, phone calls, and debt payments will stop, and the sooner you can put yourself into positive cash flow, and savings situation.
11. Paying Off Debt With the Plan to Go Back Into Debt
Paying off your debt with the plan to continue with more debt tomorrow will create even more stress and frustration. If you know that you are taking control of the debt situation and that your debt payments are slowly declining, you will put yourself into a positive wealth-creating mindset.
Rome wasn’t created in a day is the expression, and in the same vein, it will take time to pay off debt, and start moving forward. If your plan is to pay off debt, only to continue with additional debt, whether credit card or any other, could only make the situation worse.
You can make payments to your creditors every time and be happy to see your balance go down, but if you’re not changing the bad financial habits that got you into debt, then the old problem will crop up again, and once again, you’ll be in debt.
Identify the bad financial habits that pushed you into debt problems. Don’t let those habits take control of you or your life.
If you enjoyed this article, you might also enjoy this one: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
Good luck with your wealth-creating journey.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.