How to Avoid Debt Pitfalls
If you’re in debt or getting close to it, avoid these four common pitfalls.
If you’re trying to avoid debt, do you feel like by the time you pay bills you only have $20 left until your next pay day?
Do you “just make it work” and eat beans and rice all week…or do you swipe credit cards everywhere you go?
Most of us face this “bottom of the barrel” predicament at some point. Our choices in that moment can have severe consequences on our financial future.
Today’s economy is uncertain due to COVID-19. Many Americans earned less take home pay but did not adjust their spending habits. How are they making up the deficit? Credit cards and loans.
Credit cards and loans are good to establish credit. But when you use loaned money as income, you are setting yourself up for financial disaster.
Here are four pitfalls to watch out for when trying to avoid debt or when using credit cards and loans:
1. Temptation to overspend
When you use cash, you have a set budget. After all, no one has unlimited cash. When you use credit cards and loans, you are likely to spend more on a purchase because “there is room on the card” or “they approved me up to $10,000.” You may be tempted to buy now and buy the best, but ask yourself if you really need it now and if you really need the most expensive option.
2. Lack of savings
As you become more reliant on credit cards for purchases, you move away from saving. If you are not saving up for big purchases, you’re likely also not saving up for rainy day funds. Will you need to borrow money if your car breaks down? Having set aside savings is crucial to financial security.
3. Interest accrual
If you don’t pay your credit cards in full every month, you pay interest on the purchases you made with the credit card. The savings you receive on the sale price or “no interest for a year” are often negated if you do not pay your balance quickly or within the “no interest” promotional period. If it is possible, always pay your balances at the end of the month, or as quickly as possible.
Before making a credit card purchase, set a deadline for having it paid in full to maximize your savings and avoid paying as much interest as possible.
4. Becoming overwhelmed by all the debt
You may be able to make minimum payments, but what if all your credit cards are maxed out and you have a medical emergency that causes you to miss work for several weeks? You may be unable to make even the minimum payments, so your accounts start reporting delinquent and late fees start to accumulate.
Once this happens, it becomes extremely hard to ever pay the debt off. If you feel you are already in this spot, reach out to someone for financial counseling! Many credit unions offer free financial counseling to their membership, and they are willing to help you get on the road to financial wellbeing.
Depending on debt is not helping you achieve your financial goals, it is holding you back. Recognizing these pitfalls now can help you make adjustments and take control of your finances.