by Christy Bieber | June 16, 2019
Paying down your debt is one of the single best ways to improve your financial situation. After all, when you become debt free you won't have to pay interest to creditors. All that money that was making credit card companies and other lenders rich can stay in your pocket instead.
Paying off debt can also improve your credit score and make it easier for you to borrow more if you need to -- especially for purchases that can improve your net worth, such as buying a home with a mortgage loan.
But while paying off debt is important, it isn't easy -- especially if you make mistakes during the process. Errors during debt payoff are common and they can sabotage your efforts to improve your financial life. Here are some of the most common mistakes that you should make sure to avoid.
Knowing you want to pay down debt often isn't enough to be successful at such a challenging endeavor. Instead, it's best to set clear goals and have a specific plan for how you'll tackle this financial task. You should decide:
When people start paying off debt, sometimes they send a small extra payment to each creditor. Unfortunately, with this approach it can take you a long time to see real progress on paying down debt -- which makes it more likely you'll lose motivation.
Instead, you should pay the minimum on all your bills, but then decide on one particular debt to send your extra cash to. That way this debt can be paid down much faster -- and eventually eliminated -- and you'll have fewer creditors you have to deal with.
Another approach, if you don't want to worry about choosing which order to pay off debts, is to consolidate your debt. This would involve taking out a new loan -- hopefully at a reduced interest rate -- and using the proceeds from it to pay back multiple existing debts. If you have just one consolidation loan to pay, you can devote your entire debt payoff budget to the consolidated loan and will easily be able to see how your payoff efforts are going.
Monitoring your debt repayment efforts is important for two big reasons. One, keeping track of your progress helps you stay motivated. As you see your debt balance fall, you're much more likely to continue making sacrifices to pay extra. In fact, you may even be inspired to pick up a side gig or work overtime to have even more extra cash to put toward debt repayment.
Tracking your progress is also important because you'll clearly be able to see if you're not making enough progress. If your payments are barely making a dent in the principal since so much of your money is going toward interest, you'll need to make a change. This could involve refinancing debt at a lower rate, increasing your payments, or even considering drastic options such as debt settlement or bankruptcy if you're really in over your head.
It may seem counterintuitive to save money for emergencies when you want to devote every dollar you can to debt repayment. Unfortunately, if you have no money set aside when unexpected expenses arise, you're likely going to have to borrow when a problem inevitably requires you to spend.
If you are making progress on debt repayment and suddenly have to put a huge bill on your credit cards because of a financial emergency, you'll undo all your efforts. You could get trapped in a never-ending cycle and quickly lose momentum. To make sure this doesn't occur, save at least a small emergency fund and then get serious about devoting extra money to debt payoff.
Having an emergency fund is important to avoid going deeper into debt -- but unexpected emergencies aren't the only reason why you might break out your credit cards to keep borrowing. If you don't have your spending under control and aren't living on a budget, you may be tempted to turn to your credit cards for big purchases or even to cover everyday costs such as groceries or gas.
Continuing to dig deeper when you're trying to get out of a hole is a surefire recipe for disaster. So you must stop borrowing when you're working on debt repayment.
If you are responsible enough and trust yourself to pay off what you charge on your credit cards each month during the debt payoff process, you can keep using them. But for many people, it's better to switch to cash only until your cards are paid down. That way you won't be making your debt bigger even as you try to repay what you already owe.
Avoiding these common errors is essential if your goal is to pay off your creditors as quickly as possible. By making a plan, tracking your progress, devoting extra payments to a specific debt, and making sure you don't end up borrowing more during the payoff process, you're setting yourself up for success and should hopefully be debt free in no time.
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