Updated: 9/22/2010 9:00 AM ET|
10 habits that lead to debt disaster
Here are mistakes to avoid and tips to follow so you can start paying off your debt today.
Sometimes the only way to stop a snowballing problem is to go back to the top of the hill and find out what started it.
If you're up to your eyeballs in credit card debt, take a step back and recount your money missteps. Knowing your weaknesses could help prevent you from falling back into the bad-credit pit and show you a way out.
According to Gail Cunningham, the vice president of business relations at the National Foundation for Credit Counseling, consumers mired in debt make common financial blunders, most of which they can prevent with discipline and behavior changes.
Learn from these mistakes and start paying off your debt:
1. Misusing balance transfers
Transferring balances on high-interest cards to lower-rate cards can be an effective technique, but it's easy for that good idea to go wrong. Transfer a balance onto a card with a low introductory rate and you can potentially save money on interest if you refrain from charging on it and focus on paying off the balance before that introductory rate expires. But most people continue to charge on the new card and wind up with more debt once the teaser rate expires, says Cunningham. In fact, new purchases may pull an altogether different interest rate. Read the fine print very carefully, and attempt the balance-transfer maneuver only if you can control your spending on the new -- and old -- card.
Try this: If you can't refrain from charging, balance transfers won't get you out of debt. If you're really in the hole, consider getting a part-time job and dedicating your earnings to your debt load. If that's not possible, go back to your budget and cut back on unnecessary expenses, including restaurant outings and cell phone extras. Put the money you save toward paying off your balances. Pay for any new purchases with cash or a debit card.
2. Not checking credit reports
If you have credit cards, pull your credit report at least once a year and check it for errors. Purging your record of inaccuracies can be crucial for getting better interest rates, landing the job you desire and stopping an identity thief from ruining your credit rating. The scores on your credit report also determine how high your interest rates will be on future loans. Dispute anything you think should not be there.
The Fair Credit Reporting Act allows for the correction or deletion of inaccurate, outdated or unverifiable information, provided that a reinvestigation into the disputed data sides in your favor. Unfortunately, negative but truthful data must stay put. A Chapter 7 bankruptcy filing, for instance, will remain on your credit report for 10 years, a Chapter 13 for seven years.
Try this: You can request one free copy from each of the big three credit reporting bureaus, Experian, TransUnion and Equifax, every year. Why bother? Errors on your report, such as a payment marked late that came in on time, could raise your interest rates, lower your credit score and affect your ability to obtain credit in the future.
If you do find a mistake, send a correction letter to each of the credit bureaus that show the error. All three allow you to dispute errors online.
Don't bother with so-called credit-repair clinics that aim to charge you hundreds or thousands to fix your credit record. "Anything you can legally do to repair it, you can legally do for free," says Cunningham. Of course, if you're not willing or dedicated enough to write those letters and follow up with the credit-reporting agencies, paying someone else to do it for you may not be such a bad idea. It's better to have someone dispute the errors rather than no one. But be extremely careful in selecting such an organization -- try to get referrals and seek out others who have been satisfied with the service.
3. Failing to alert creditors about a financial hardship
You heard the rumor: Layoffs are coming to a department near you next week.
Don't wait until it happens to worry about how to pay your bills. Do some damage control right away.
Try this: "The best time to negotiate is before the problem spirals downhill," says Cunningham. Call the credit card company and explain the problem you're about to have. Ask if they could temporarily lower your interest rate or extend your payment deadline. Some issuers have in-house help programs that provide such short-term services to customers.
4. Thinking of 'budget' as a dirty word
The word may call to mind tedium and self-trickery, but everyone can benefit from deciding on certain amounts for spending -- and sticking to the amount. It also makes sense to budget for known future expenses, such as quarterly insurance premiums, college textbooks and rent. Not saving up in advance means you'll have to charge expenses or cut into funds set aside for necessities. Budget these fixed costs while you can handle small financial pinches.
Try this: To find out what's draining your finances, keep track of where your money goes for a month. Use a spreadsheet, financial software or a pen and paper to categorize your expenses. This will reveal whether you're spending too much on expenses you could trim, such as restaurant outings and gas. Then you can consider cooking at home more often or consolidating driving trips. Cut back as necessary without cutting out expenses important to you. Cunningham suggests that if you enjoy watching TV but don't tune in to a majority of the 300-plus channels you have, cut back on your cable package instead of cutting out TV altogether.
For a detailed household spending plan, try this home budget work sheet. Or get help creating a budget with a budget calculator. Plan for future costs by figuring out the total amount you'll owe and divide by the number of months you have until that day, says Cunningham. If you have money due next month, divide by the number of weeks you have and save that amount every week.
5. Using retail store credit cards to take advantage of discounts
Chances are that that card carries a high interest rate you'll be forced to deal with if you don't pay off your balance each month.
Try this: If you must charge your purchase, use your general-purpose credit card, says Cunningham. If you can't pay off the balance, at least you'll pay a lower interest rate. Limit the total number of credit cards you have to just two, if you can: one you can pay off each month and one with a low interest rate for those large purchases you'll pay back over time.
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