Debt Free

There are many mistakes people make when aiming for that laudable goal of becoming debt free. Here are some of the more common ones.

1) Closing Accounts Once They Are Paid Off – Many people close their credit card accounts as they pay them off. Don’t do this. One of the components of your credit score is the ratio of your outstanding debt to the aggregate of your available credit limit. If you have a large amount of available credit and very little or no debt, it will add to your credit score. In addition, the amount of time the accounts have been open will lengthen your credit history, which will also help raise your credit score. If you close your accounts, you can hurt your credit score. Unless the cards have high annual fees, don’t close them. If you don’t want to use them, cut them up.

2) Not Changing Spending Habits – If the money keeps going out at the same rate that got you into debt in the first place, logic dictates the problem will continue. Use the ole noodle! You’ve got to change your lifestyle. It may hurt in the short term to not take expensive vacations or have the latest consumer goods, but those things are luxuries you simply can not afford.

You need to be creative. Go camping somewhere you can drive to in a few hours for a vacation. Look for good, used appliances if you need a new washer or dryer. It may be relaxing to have those Friday dinners out, away from your kids. You may really look forward to it all week long, as your boss harangues you relentlessly. But things like that can add up fast. Once you pay for dinner, a sitter, parking and gas, you could easily be out $75.00 - $100.00. That money would better spent right now to pay down your credit cards. Just treat your boss like that guy on the cereal commercial and don’t listen.

3) Being Penny Wise and Pound Foolish – Saving money is great and a key component of becoming debt free. After all, every dollar you don’t spend is like getting a raise for that amount. That strategy can be taken too far, however. Being a cheapskate on some things can come back to cost you big time later.

For example, don’t skimp on maintenance for your car. While such things may seem expensive, it could set you up for a whopper of a bill later. Not changing the oil or having services performed at recommended intervals could not only leave you stranded with a major repair, it could void your car’s warrantee, leaving you stuck with the bill. For example, the transmission in most modern cars will set you back $3,000 - $5,000 if it needs to be replaced. Most people don't have that kind of money just laying around. Likewise, running the tires so they're as smooth as Mr. Magoo's head could cause a major accident, so don't do it. Health care is another place where being cheap now can cost you big time later. It would be a shame to skip your checkup only to miss catching a serious health problem. Medical bills cause over half of all bankruptcies. Don’t let that happen to you, if you can possibly avoid it.

4) Choosing the Wrong Repayment Strategy – There are many ways to pay off your debt. You can get a debt consolidation loan to eliminate your credit card payments, then pay off the consolidation loan. You can use the difference to contribute to your emergency fund. You do have one of those, right? As I’ve discussed before, this method can be attractive, but is not without risk. In addition, if you choose this method, pay off the consolidation loan early if at all possible. Stretching out a consolidation loan to the full term can cost you bundle in interest, even though the interest rate is comparatively low.

Another option is to simply continue paying your debts down as you are doing now. A mistake here is not paying them down fast enough. Again, this will cost you a bundle in interest. Make sure you make a monthly budget if you choose this method. After you make the budget, stick to it! It doesn’t do any good if you just treat it as a general guideline.

If you avoid some of the pitfalls, you can get out of debt. Look carefully at your personal situation. Devise a strategy that will work for you. Most likely this will be a combination of techniques. The three main points to remember are:

1) Control Your Spending – Vitally important, this may require a substantial lifestyle change.

2) Maximize Your Income – Can be easier said than done. Work overtime, get a second job, start a small business you can begin with little money(Hard to do). Remember, every extra dollar you make and contribute to eliminating your debt is multiplies because you are also eliminating future interest payments.

3) Eliminate High Interest Debt First – You have to look not only at the interest rate, but also at the amount of the debt. For example, if you have a credit card with a 22% interest rate, but only an $800 balance, and another card with a lower, 18.9% interest rate, but a $10,000 balance, work on the $10,000 card first.

Remember, you can get out of debt. Set goals, stay focused, never quit.

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