What you're doing wrong with your debt

What You’re Doing Wrong With Your Debt

It’s likely that you only use credit cards to make everyday purchases. People don’t often carry around cash anymore simply because credit cards are more convenient. You might even have several cards for specific stores. You make payments here and there and wonder why all the sudden, you’re thousands of dollars in debt. $40 on gas + $100 on groceries + $5 on coffee + $15 on lunch during the week will definitely add up. I can also bet that you’re not just at the coffee shop or sandwich stand next door once a week. Then take that credit card debt and add it to your car payments, student loans and mortgage and you’re likely drowning in all the numbers next to that dollar sign. There are several ways to pay off your debt, but some methods are more effective than others. If several years have gone by and you’re still making payments on credit cards and loans, you’re probably doing something wrong.

Here are some of the common mistakes people make when paying off debt and how you can get out of that trap as soon as possible:

You don’t have a plan

It’s great that you are putting payments on your credit cards, but without a smart plan, you won’t really see your efforts pay off as much as they can. If you have several credit cards, it’s smart to make a list before you tackle them. Write down the credit card name, balance due, interest rate, minimum payment and due date. Some people have made the mistake of putting the minimum payment on all their cards or focusing on the credit card with the most balance. While this is a plan, it’s not the best one. Instead, focus on the card with the highest interest rate as that the one worth paying off first and the pay the minimum on the rest of your cards until you can solely focus on them. You’ll pay off your debt quicker in the long run when you’re paying off bigger amounts on a single card. Mainly focusing on one balance also makes your debt seem less overwhelming as opposed to throwing $50 here and there on multiple cards at the same time.

You’re missing payments

While you’re devising your plan, set up all your accounts to automatically pay by the due date. This will ensure that you’re not hit with late payments. If you know exactly how much will be coming out of your bank account and when, it’ll be easier to make sure you have the right amount of funds for that payment every time. You can even change the payment dates to work around your paychecks. Noting all of your debt information on paper or on a spreadsheet will help you see things in a bigger picture so you’re prepared every month. If you are charged with a late fee, call the credit card company and kindly ask if they will waive it for you. They’ll be more likely to reverse the fee if you tell them you’ll be setting your account to automatic payment, if this is your first late fee or if you’ve been a long time valued customer. It never hurts to ask.

You keep a balance on your cards to build credit

Keeping up your credit score should definitely not be a priority over paying off your debt and it’s likely that your good credit score got you into this debt in the first place. Carrying a balance on your card each month that you’re being charged interest for is actually ruining your credit. Pay off your debt now and stop worrying about hurting your credit score. There are several ways to boost your credit when it’s time, but for now, paying off these cards should be number one on your list. Also keep in mind that just because you have a high limit on your credit card doesn’t mean you should be maxing it out. A $15,000 credit limit does not equate to a shopping spree. In fact, you should be keeping your utilization rate low and your balance should not exceed 30% of your credit limit. For example, a card with a limit of $15,000 should never have more than a $4,500 balance. Doing this will definitely protect your score later.

You’re putting it off until you make more money

“When I make more money, I’ll pay this card off. When I make more money, I’ll clear all my debt. When I make more more money, life will be great.” Well when will that be? The time is now. The longer you procrastinate paying off your debt, the more debt you’ll be in. Simple as that. An emergency might come up. Your company might downsize. You might decide to pursue a different career and end up working a lower paying job until you learn the ropes. Who knows what can happen, but you don’t want to have all this debt acquiring on top of it all. Start paying off as much as you can starting now.

You don’t know your options

Stuck paying a high balance on loans you simply cannot afford right now? Got a balance with high interest rates? You have options and asking what they are is where you can start. If you’re paying off student loans and don’t make enough money to pay the monthly payments, don’t have a job as a recent graduate or recently got laid off, you can request a deferment or forbearance for a certain amount of time. Stopping payments on student loans for now can help you focus on your other debt. Refinance your car to reduce the amount you pay each month, reduce your interest rate and change the length of your loan. Also ask your credit card company if you can reduce the interest charge on your monthly payment. Some companies will grant this request if you’ve been a loyal customer who makes payments on time. It also helps if you have a good credit score or if it has recently improved. These companies want to keep you as a customer so simply request a lower interest rate and hope for the best.

You always give into your friends’ invitations

We’re not telling you to live like a hermit crab until you’ve zeroed out all your cards and loans, but you need to be smart about where you go out and how often. As much as you want to and as hard as it is to break bad habits, don’t accept every invitation your friends throw your way. Lunch here, coffee there, brunch on weekends and happy hour during the game can cost you hundreds of dollars a month when you add it all up. Plan accordingly, choose the events and be ready to decline if it’s something you can’t afford to do. Only try going out to celebrate your friends’ special occasions like birthdays and anniversaries and avoid the random “Wanna grab a drink?” invites. If your colleagues always go out for lunch on Fridays and you don’t want to miss out, vow to eat a packed lunch for the rest of the week and choose an affordable option on the menu. If you’re invited to watch the game at a bar during happy hour, eat at home first and you won’t be tempted to order something at the restaurant. You also don’t need to order a drink to enjoy the game. Be smart and disciplined (almost like you’re on a diet). When you’re on a diet, you watch what you eat, you create a meal plan, resist temptation and create incentives when you achieve your goals, like if you lose 10 lbs. in 2 months, you’ll buy new workout shoes. When you’re on a spending diet, you need to decide what’s a necessity and what’s a splurge. Create incentives the same way and treat yourself without breaking the bank. For example, for every $1,000 you pay off, reward yourself with a Netflix binge, a drive to the beach, a homemade pancake breakfast or a lazy day to sleep in and do absolutely nothing. Having a reward system for your goal to pay off debt can help you achieve it faster.

It’s not a priority

Having large amounts of debt can be extremely detrimental to many factors in your life. It can affect you buying a house, buying a car, going on vacations, changing your career, opening up a business or going to grad school. It can even cost you landing your dream job as a larger percent of employers check your credit along with running a background check. According to a 2012 study from the Society for Human Resource Management, 47% of U.S. companies conduct credit checks and if they see that you have poor credit history, have missed payments, filed bankruptcy or have large amounts of debt, it could cost you the job.

Your life will benefit greatly when you learn how to manage your money, pay off cards in full and on time, and experience what it’s like to live debt-free. It’ll feel like a huge weight has been lifted off your shoulders and you could be a lot closer to it than you think. Just make paying off debt a priority, cut out the bad habits that are costing you money, make a plan, find out your options and be disciplined. This can be hard, but it can be done. You just have to start somewhere. Don’t let debt run your life and the sooner you start paying if off, the sooner you can start living your life to the fullest.

Top 5 causes of debt

Top 5 Causes of Debt & How To Fix Them

They say it’s smart to have between 3-6 months worth of expenses saved up in case of an emergency. To give you an idea, if your monthly expenses round up to $5,000, there should be $30,000 sitting your saving account right now. But in this age of consumerism, people are likely swimming in debt instead of in a comfortable amount of hundred dollar bills. As of May 2016, 38.1% of all households carry some sort of credit card debt and according to the most recent survey from the U.S. Federal Reserve, the average credit card debt of U.S. households is about $5,700. That’s a lot of money to be sitting on credit cards that likely comes with an interest rate that will boost that debt even higher.

Sometimes, debt is accumulated from massive charges that are typically unexpected such as a medical emergency, a broken car or a divorce, but usually, accrued debt is over a longer period of time by charging common expenses like gas and groceries. These “small” charges here and there look unthreatening at first, but then it spirals out of control where you end up only paying the minimum balance each month, leaving you with more interest to pay in the future.

Here are the top 5 causes of debt and some suggestions for how you can get address the problem.

1. Divorce

The leading cause of arguments among couples revolves around money more than any other causes of typical domestic disputes. It’s likely that one or both parties had accrued debt prior to getting married and “what’s yours is mine” unfortunately applies to the bills too. Although it’s recommended to discuss money and spending habits before tying the knot, if couples don’t create a reasonable plan to paying off debt and spending money, it will lead to marital strife that can turn into divorce. The average percent of divorce in the United States is between 40-50% and the cost of getting divorced is $15,000-$20,000. Also going from a two-income household back to one can take a significant toll on your bank account.

2. Unemployment & Underemployment

No one expects to lose their job and it never comes at a good time. Unless you have the recommended 6 months worth of expenses stored in your savings account, you’re going to have a lot of accrued debt sooner than later just to pay off your current bills and it’s possible that it’ll take longer than 6 months to get another job. There’s also the unfortunate occurrence of taking a pay cut when having to suddenly work part-time either due to having a child, a medical issue, or getting fewer shifts at work. We’re creatures of habit, so although our employment status might have changed, it’s very likely that our spending habits haven’t. People are typically spending more than they earn and recent studies have shown that although income is decreasing, the rate of spending is still climbing up, which leads to the next reason for debt.

3. Poor Money Management

Related to financial illiteracy, not many people have a good grasp of managing the money they earn likely because they were never taught the simple rules of spending and saving growing up. These people rely on credit cards for expenses and the idea of instant gratification is a major factor. It’s so appealing for us to buy something and have it now, but pay for it later. If you don’t pay off your credit card balance in full, you’ll end up paying a good chunk of it in interests. Most credit cards today have an interest rate ranging between 15-20%, making anything you buy cost a whole lot more than what you paid for. This also ties in with impulse spending and making poor financial decisions. Having a monthly game plan to tackle your common expenses will keep you from spending more than you make. It’ll also be a good idea to educate yourself on the rules of the bank, loans and credit cards to see if you can reduce your fees, avoid late charges and have 0% APR for a set period of time.

4. Minimum Payment Trap

So you racked up a credit card and can’t pay the full balance. You know you have to pay something on it so you set up your account to automatically pay the minimum every month and brush it off, feeling assured that payments are being made. Months later, you check your account and wonder why you still owe so much. Well, that’s interest for you! Here’s an example to give you an idea: If you owe $10,000 on a credit card and pay a minimum of $250 per month and your interest is 15%, you’re going to be paying $3,950 in interest in the 56 months it’ll take you to pay it off. That $10,000 easily turns into nearly $14,000 before you know it. If your interest rate is 20%, that payment towards interest becomes $6,617 and it’ll take you 67 months to pay it all off! That’s over 5 years of your life spent paying off this credit card while you’re stuck paying off your typical expenses too, such as food, gas, rent or mortgage and a car. Bottom line is that you should always pay the balance in full, but if you can’t, pay as much as you can as fast as you can.

5. Military Status

A recent study revealed that members of the military accrue debt at a higher rate than civilians and there are a number of reasons why. First of all, military members may be receiving a steady paycheck but it isn’t large enough to support their means, especially if they’re supporting a family, making them resort to credit cards to compensate. Next, frequently moving can add to the debt if an active military personnel is forced to sell their home and they can’t get an immediate buyer. They end up paying two mortgages until they receive an offer on their old home. It may also be difficult for the spouse to find a good-paying job right away during relocation. And finally, when military members find themselves in debt, they end up staying in debt because they don’t want their superiors finding out. They don’t seek out help due to their fear of losing their security clearance, ruining their chances of a career advancement or being discharged. This just makes their debt continually increase.

If you’re currently in one of these situations, there are a number of routes to take to reduce your debt, but the first step should be to come up with a spending plan and stick to it. Review your spending habits and see where you can cut down. Your daily cup of Joe at the local coffee shop can definitely add up in the bills. Pay your balances in full as often as you can and use cash if you’ve got it. People tend to spend less when they only use real money to pay. And most importantly, if you’re married, make sure you keep all lines of communication open and ask for help if you need it. In a perfect world, both parties of the couple will be savers but that’s an unlikely story. If you’re the spender, it might be a good idea to have your spouse manage the money until you’ve got a good grasp on saving more money each month.

If you feel like you’ve tried it all on your own and need professional help, one of our professional and friendly counselors here at Pacific Debt can talk you through your options. Our consultations are free and it’s our goal to get you out of debt for less than you currently owe.

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