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America’s debt crisis probably affects you or someone you know–the average debt load in America is just under $16,000.Maybe you’ve even tried several debt solutions, but still feel crushed underneath its weight.
Perhaps by doing things that won’t get you out of debt, you are cancelling out the things that will. Here are a few behaviours debtors should avoid when trying to get back in the black.
1. Falling Victim to a Debt Snowball
Unlike the debt repayment method popularised by Dave Ramsey, accumulating a debt snowball occurs when you become a victim of compound interest.
Compound interest is, put bluntly, terrible. You begin paying interest not just on the principle of your credit cards and loans, but the interest itself. As this occurs, interest eats up more and more of your payments. For those with interest rates above 25 per cent, a debt snowball might keep you in debt for life.
2. Paying the Minimum Balance
This one is a no-brainer. We’ll say it again, for the 1,000th time: The minimum payment is designed to keep you in debt to your credit card company.
If you want to get out of debt, you need to make significant inroads toward paying it down.
Do some maths and figure out how many payments you need to make to pay off your credit card debt in one, three or five years. Start making payments in that amount. This is the only way to slow the debt snowball and finally get out of debt.
3. Spending the Same Way
Getting out of debt almost always requires some degree of change to your spending habits. One easy way to make changes is to look for places you are wasting money, then cut out the waste.
Common ways people waste money include spending too much on little things like gourmet coffee or purchasing unnecessary services, like extended warranties and certain types of insurance. Take a look at your budget with an eye for trimming waste. This will allow you to pursue debt solutions while leaving the things you love most in your life intact.
4. Failing to Budget
An old saying goes that while people rarely plan to fail, they often fail to plan. Apply this to your own financial life.
Every household needs a financial plan in the form of a budget. Having a set budget every month that includes things like entertainment and luxury spending allows you to track and plan for the little splurges that make going to work every day worth it. It also helps you avoid impulse purchases chipping away at you. If it’s not in the budget, it doesn’t get spent.
5. Continuing to Use Credit
If you’re trying to get out of debt, buying on credit won’t help. To truly plan for your own personal debt crisis, you have to stop using credit cards.
Don’t close your accounts, necessarily. This can negatively impact your credit score. However, you should cut up all your cards, save for one that you only use in dire emergencies. Hint: Your need for a new pair of cute shoes doesn’t count.
Getting into debt is easy, but getting out isn’t. If you need to get out of debt, you need to make some sacrifices and do some careful planning. You also have to avoid common behaviours that keep people in debt. It might take a few years, but get out of debt you will.