Getting into debt is easy.
Today millions of people carry debt burden on their shoulders.
Although most people make earnest efforts to get out of their debt-trap, but somehow they falter on their way.
They land themselves into a debt-trap.
They feel disappointed and frustrated and often struggle to meet their ends.
However, there is a silver lining.
Falling into the debt trap does not mean that it is the end of the road for you.
You can manage your debt and come out as a winner.
By following an appropriate debt management strategy, you can easily manage your financial life.
Here, I have listed 10 Debt Management Mistakes that you should avoid making sure that you manage your debts smoothly. You will not falter on your debt management efforts if you take note and do not make the 10 Debt Management Mistakes that have been listed below.
10 Debt Management Mistakes to Avoid
Paying Late or Not Paying at All
Paying late or missing out your debt repayments is not at all a healthy sign with your debt management efforts. Whether it is a loan installment, credit card payment, or some other kind of debt, you need to be punctual in your debt repayments. Paying late or failing to pay installment towards your debt is not good at all.
The biggest drawback of paying late or not paying at all has a direct implication on your overall credit score. Your credit score falls down and so you may encounter difficulty in getting new loans or increasing your credit limit.
Another obvious effect is the fact that by paying late or not paying at all incurs heavy penalties and interest charges which actually increases your financial burden. The best way to tackle this problem is to set up automatic payments with your bank.
So there is no need to carry on your mental game and keep everything is your head. You can ease your burden of debt management by making automatic payments.
Minimum Payment Trap
Don’t fall to the minimum payment trap. It might seem that by paying the minimum amount you are managing your debt, but the fact is that it does not help to reduce your debt burden in any way. The interests and charges keep on piling up. Further up, it increases the lifetime of your debt repayments. So whether it is a student loan, personal loan, credit card bill, always avoid the trap of the minimum payment. Thus, you should prepare your monthly budget in such a way so as to allocate a maximum amount to cover up all your debt repayments. You have to understand that by paying just the minimum amount you will never going to get out of debt.
Using Your Emergency Fund
Emergency Fund is primarily developed to manage a financial crisis. It is meant to fund an emergency. An emergency situation can be a medical ailment, an accident, or even a loss of job. Ideally you should build your emergency and keep it intact for meeting any kind of emergency. Using Emergency Fund to manage your debt repayments is not a wise step at all. Although you may be successful in managing your debt, but it empties your emergency fund.
In case, any emergency situation arises you are left with no cash resources to meet out the costs. With no emergency fund, you are left with no backup resources to handle your crisis. Eventually, you have to go for taking up a great amount of debt and that too with a high interest rate. So using your emergency fund is one of the top debt management mistakes.
Not Checking Your Credit Report
If you want to keep on track with your debt management efforts, you need to have full clarity on your overall debt obligations. Credit reports and statements are instrumental in determining your overall debt obligations. So, if you go onto ignore your credit report and statements, you can never manage and devise a strategy for meeting your debt obligations. Ignoring credit reports and statements do not leave you any richer.
On the contrary, not checking the credit reports and statements can eventually turn out to be costly and time consuming for you. Ignoring credit reports and statements are a costly debt management mistake. If any errors and discrepancies exist, they cannot be disputed once you ignore the statements and credit reports. Thus, you should always check your credit statements and reports. If you find any error, you should go on to report it to the creditor immediately so that it is resolved as soon as possible. This way you can save your time as well as money and effectively manage your debts.
Neglecting Your Credit Card Debt
Most people that have multiple debt obligations make the mistake of neglecting their credit card debt. Although it is a good idea to pay off highest interest-rate debt first, it is equally important to be regular in your credit card payments. If you falter on your credit card repayments, interests and charges get accrued to your overall due amount. When you default on credit card payments, there is a negative impact on your credit ratings. So it is necessary to plan and budget your expenses so as to include credit card payments. It would be in your interest to pay in full and clear off your credit card debt. Debt management means that you have to take care all of your debt obligations. You have to come up with a viable strategy of managing your debts. You should prioritize your debt repayments, but should never neglect any repayments including credit card debt.
Not Having a Clear Debt Management Action Plan
Debt Management demands systematic approach. You have to be clear, precise, and accurate in your debt management. With no clear debt management action plan, you invariably end up being a loser. You suffer financial losses that could have been easily saved. It is just like entering a playing arena with your eyes closed. A lax and casual approach makes your debt repayment a lengthy and tedious process. You go onto default on your debt repayment. With the absence of a detailed debt management action plan, you just cannot achieve your financial goals.
Accumulating Bad Debt
Debt management takes a severe hit when you go onto accumulate what is known as “Bad Debt”. For instance when you take debt or use your credit limit for buying a home theatre system, may be a bike, or even for making a vacation. These are unnecessary and are termed as “Bad Debt”. The “Bad Debts” bring an added burden on your shoulders and go on to disrupt your whole debt repayment plan. Taking a student loan or home loan or taking debt for meeting your medical and hospitalization expenses can be considered as necessary and unavoidable.
However, taking out a loan merely to finance your trip or holiday vacation is utterly unnecessary and useless. You should look for other means, perhaps develop a savings fund to finance such requirements rather than preferring to take a new loan or credit. It is not a good idea to aggravate your debt repayment expenditure merely for paying out for your “Bad Debts”. In my opinion, accumulating bad debt is a futile debt management mistake.
Not Preparing a Budget
It is not that you only have to manage your debt, but you also have to meet your monthly expenses and invariably make some room for your future savings. So, you have to analyze where you spend your money. You can easily do this once you prepare your monthly budget. Not preparing a budget you invariably end up disrupting your financial life. You don’t have any idea of how much money you should be spending, what are your financial goals, and how should you be allocating your money in various categories. Plus: you also have to make provisions for your future expenses.
With no budget in the place, you cannot manage your expenses and invariably experience a shortage of funds. You default on your debt repayment and everything gets mismanaged. Not preparing a budget can turn out to be a costly debt management mistake. The solution lies in preparing a budget. You can use a spreadsheet or can even use financial software. You can even use a notepad to plan your budget.
Buying with an Eye on your Future Income
Ideally, whatever purchases you make should be based on your current income. You should not depend on your future earnings so to pay off your present debts. It can quickly turn disastrous for you. So, buying with an eye on your future Income is a big debt management mistake. The idea is simply not a safe one. You go on compiling debt thinking that your future earnings will adequately cover all your liabilities. However, if anything adverse happens and a crisis arises, you will fall flat. Thus buying an expensive car, a bigger home can lead to increase your debt load. If you are not able to gain in terms of your earnings, your debt management plan will never materialize. So, you need to play safe and should not buy with an eye on your future income.
Using Credit instead of Cash or Debit Card
You are not doing any good to your debt management efforts when you go out and use credit instead of cash or debit card. Frequently charging your credit card to make small purchases can quickly compile up the overall balance (on your credit card). Moreover, if you are not making full payment on your credit card bill, it goes on to add the extra charges and interest. So, you end up paying the principle as well as interest. You could have easily avoided these charges if you had used cash or debit card to pay for your frequent small purchases. Developing the habit of using cash or debit card goes a long way in managing your credit card bill. So, use cash or debit card and avoid a costly debt management mistake.