Updated July 2020
If getting out of debt were easy, fewer people would be in debt! We know that’s not the case because the average American household has more than $8,700 in debt and according to a recent study a record number anticipate being behind on their debt payments in 2020.
The problem is not that we have debt, but instead the mistakes that we are making that cause our debt to get out of hand.
Why is Our Debt Out of Control?
Most Americans have trouble with their debt because they’ve taken on more than they can afford to pay. Sometimes this is because of poor spending habits, but often debt can balloon out of control as a result of financial hardship or income insecurity.
If you lose your job and do not have an emergency fund, then you can be in trouble quickly. Additionally if you have taken on high-interest debt you may find yourself unable to keep up with a rapidly growing principal balance.
Reasons for Out of Control Debt:
- Financial Hardship
- Income Insecurity
- Poor Spending Habits
- High Interest Debt
Unfortunately, getting out of debt involves more than a resolve to do so. Regularly paying on your credit cards and loans is certainly important, but may not make a dent in your debt if you are making other financial mistakes.
Making Progress with Your Debt
Making real progress means changing spending habits; learning how to budget; knowing to whom and how much you owe; prioritizing debts; creating emergency and retirement funds; and knowing where to find help when you get off track. Sometimes, the best way to get out of debt is to work with Certified Debt Specialists.
In other words, there are a lot of decisions that need to be made. It’s also likely that you’re going to make some mistakes along the way. Here are a few of the most typical, and how to avoid them.
Mistake #1: Never Changing Your Spending Habits
We are creatures of habit. We shop in the same stores, buy the same brands, even eat in the same restaurants because it’s what makes us comfortable. What you don’t realize is it could be costing you more than you can handle financially. Changing your spending habits is essential to getting out of and preventing future debt.
Look at your spending over the course of one month. Where are you spending the most money? Are you buying a coffee every morning? Do you get takeout for lunch and dinner regularly? Do you buy more expensive brands because you haven’t considered alternatives? You can eliminate a lot of extra spending by changing small habits and finding substitutes for more expensive products.
Find and cancel old subscriptions.
Mistake #2: Taking on New Debt Too Soon
If you are making regular payments and making progress toward paying down your debt, you may have the urge to celebrate by taking on new debt. Even though you might think you are ready to start paying for a new car or opening a new store credit card, for example, it’s usually not a good idea.
Taking on new debt can hurt your credit score, and if you overestimate your ability to start paying new bills, you could quickly get in over your head in payments that you can’t afford.
Paying down debt takes time. Debt relief programs, for example, typically take 12-48 months and balance transfers and debt consolidation loans could take even longer depending on the options you choose. This means you will need to be patient.
How will I know when I am ready for new debt?
You should never take on a loan or spend money on a credit card if you cannot afford the monthly payments required to pay it back. Even if you have a high-income and can afford the payments you’ll want to make sure that you are practicing good habits that will help you repair your credit.
You Might Be Ready For New Debt If:
- You have a steady income and can afford the payments
- You have an emergency fund
- Your Debt Utilization is under 35%
- You have no late payments or delinquent debt
- Your credit score has improved after 6-12 months of on time payments
Mistake #3: Not Consolidating Your Debt
If you have multiple debts to pay every month, you could be spending more money than you should in varying interest rates. Debt consolidation is a common way to refinance your debt. It involves paying off high-interest credit card debt with a new lower interest credit card or loan. Having one interest rate on your debt that is a fraction of a percentage lower, can save you money over time.
Consolidating your debt allows you to focus on making one payment on the new loan, rather than multiple payments.
Is debt consolidation my only option?
If you are considering debt consolidation, you may also want to consider speaking with a Certified Debt Specialist about a debt relief program. These programs are designed to help you save up to 50% on your enrolled debt.