17 Mistakes You Should Avoid When Trying To Get Out Of Debt

It’s hard keeping up with the Joneses without going into debt. Everyone does it. Why shouldn’t you?

Unfortunately, about the worst thing you can do to your family is going into debt. Building wealth for your family’s future is virtually impossible while you’re carrying a mountain of debt.

Not being buried in debt allows you to do a lot of things that you wouldn’t be able to do otherwise. You can buy a house, go to college, pay for emergency expenses, or buy a car without having to worry about making the payments immediately.

There are three truths to debt:

• Getting into it can be fun
• Getting out of it is not
• Getting out of debt is definitely worth the effort

Being in debt is like living under a dark cloud. Getting out of debt can be life changing. Millions of people have done it, so you can too.

There are a few things you’ll want to avoid to be successful.

1. Being Too Hard on Yourself

Being overindebted has negative connotations. If you find yourself struggling to make loan payments each month, you might see it as a personal failing. However, experts in household finance say that being unable to resist temptation is just one of the reasons you might end up borrowing more money than you can repay quickly. Research spanning several decades suggests that having a low income and lack of financial resources are bigger factors than having low self-control.

This is a widespread problem – in May 2019, more than 40% of US consumers struggled to pay a bill or expense in the previous year. This was especially true for those with lower incomes or credit scores, but nearly 20% of people earning $100,000 or more also struggled. So instead of beating yourself up, use that energy to avoid making these other mistakes.

2. Not Taking Advantage of Help

You don’t need to try to pay off your debts by yourself. A nationwide network of nonprofit credit counseling services can help you by giving you personalized, face-to-face assistance with taking control of your debt and finances. For a small fee, they can help you set up a plan for managing and eliminating your debts.

Debt management plans offered by consumer credit counseling agencies were created to help consumers repay their debts in a timely manner. If you are struggling to repay your debts, the National Foundation for Credit Counseling (NFCC) can provide a referral to a local consumer credit counseling agency. These agencies offer debt management plans to help consumers repay their debts in a timely manner.

3. Not changing your spending habits

Do you do things without thinking about them? Do you go to Starbucks every morning? Go grocery shopping without a list? Feel an irresistible urge to buy the newest iPhone? Pick up dinner at Applebee’s on the way home from work?

When you have routines that make your life comfortable, convenient, and cool, you may be wasting money needlessly.

What were you thinking about when you bought those things? This is the root of the problem.

The most likely answer is that you were not paying attention and were going through the motions on autopilot. To fix this, pay attention to your spending and make an effort to save money.

4. Trying to dig out of debt alone

Although it may be difficult to ask for help, it is often the best solution to a problem. By admitting that you need assistance, you are indicating that you are willing to work to find a solution. Many people are embarrassed to reach out to their friends and family for help, but it is often the best course of action.

The counselors can provide different solutions depending on how severe the financial problems are. These solutions include debt management programs, credit consolidation, debt settlement, and bankruptcy. They can also help create a budget and teach how to avoid debt in the future.

5. Signing up for an Illegitimate Debt Relief Program

Debt relief programs can help improve your financial situation. However, it is important to remember that these programs require effort to be successful. If a program seems too easy to be true, it is likely not legitimate.

Note that there is no easy solution. Debt relief plans usually take 3-5 years, so be patient. In addition, be prepared to work hard to get yourself out of debt. If an agency tells you that you won’t have to do any work, they are not telling the truth.

6. Neglecting Financial Literacy

Low-income people who are good at managing money tend to have lower debt-to-income ratios, according to research from the United Kingdom. Financial literacy leads to better borrowing decisions. For example, understanding the effects of compounding interest can help people avoid the high-cost of borrowing.

There are a number of ways you can improve your financial literacy, such as studying personal finance books, magazines and online information sources like Forbes Advisor. In addition, the nonprofit National Endowment for Financial Education has funded the development of several research-based financial literacy-boosting programs.

7. Failing to Budget

Your monthly budget must include all of your income sources and all of your necessary expenses, such as your mortgage, food, and transportation costs. Then, create a list of your discretionary expenses, such as entertainment and dining out. Once you have a clear picture of your spending, you can work on cutting back in areas where necessary. In order to successfully repay debt, you must first change your spending habits. To do this, develop a budget that encompasses all income sources and necessary expenses, such as your mortgage, food, and transportation costs. Next, create a list of your discretionary expenses, such as entertainment and dining out. Once you have a clear understanding of your spending, you can begin to cut back on unnecessary expenses.

To stay within your budget, simply track your income and expenses and make sure your spending is less than your income. You can develop a practical plan to control your spending and balance it with your income by following a few easy steps.

8. Trying to pay off multiple debts at once

There are some bills you have to pay every month, like your mortgage, car payment, and utilities. Then there are other bills that you can only pay a portion of, like your credit cards. A lot of people try to take care of both kinds of bills every month. That’s not a good idea.

One method is to pay off the bill with the highest interest rate first, as it will save you money in the long run. Paying off the higher-interest debt first, then working your way down, is a mathematically sound way to go about paying off your debts.

9. Closing accounts when they are paid off

After finally paying off a credit card, you will likely feel two conflicting urges. The first is to celebrate, and the second is to close the account. Even though it may be satisfying to close the account, it will actually hurt your financial recovery in the long run.

You should not close your account even though it may sound counterproductive. It is better to keep unused credit cards open. Credit scoring models give consumers points for having long-standing credit accounts and for using a small amount of their credit limit.

Do not get rid of a credit card unless it has an annual fee that is too high.

10. Not Tracking Your Progress—or Rewarding Your Successes

Nowadays, you can use gamification to reduce your debt more effectively. Gamification uses your brain’s reward system to help you achieve your savings and other personal finance goals. The main idea is to create challenges, competitions, and rewards related to your debt-reduction goals.

It is important to track your progress and reward yourself when milestones are reached. For example, when you pay off a high-rate credit card, you can buy an item of clothing you want. Personal finance apps such as Digit and Qapital use gamification-type techniques to help you achieve financial fulfillment.

11. Falling for Scams That Prey on the Indebted

For-profit and nonprofit organizations offer debt relief programs that can be beneficial for individuals who are struggling to make payments. These programs can provide credit counseling, debt management, and assistance with applying debt settlement techniques, such as negotiating reduced interest rates, changing repayment terms, reducing the amount owed, consolidating debt, and refinancing.

Debt relief scams are common, especially targeting people who are vulnerable. These scams often involve charging excessive fees, having unclear terms, and making false promises. The CFPB has a website where people can file complaints about debt relief programs. If you’re looking for a legitimate debt relief program, you can try contacting the NFCC or the Financial Counseling Association of America.

12. Needlessly Filing for Bankruptcy

The bankruptcy law provides a way to get out of debt and start over, but it has limitations and can harm your credit score. It’s worth considering other options like credit counseling before deciding to declare bankruptcy.

13. Borrowing from or ending contributions to a 401(k)

Many people have a large sum of money that they could use to pay off debt, such as their retirement fund. While this is one way to solve the problem, you must consider the long-term effects. For example, do you really want to work at McDonald’s until you die?

Do not use your retirement fund or take out a 401(k) loan to pay off current debts. There are generally severe financial penalties if you withdraw money early. In addition, many companies at least partially match your retirement contributions. This is free money.

The third thing to do is to understand how your retirement income will grow over time. If you start contributing early, your money will have more time to grow. Try to put away 5-10% of your income for retirement if you can. If that’s not possible, that’s okay. Just don’t take money out of your retirement fund. You shouldn’t have to work during your golden years.

14. Not setting aside emergency savings

Approximately 56% of Americans claimed that they would not have enough money saved up in January of 2022 to cover the cost of an emergency, according to a study done by Bankrate. This means that if something unexpected were to happen, such as a car breakdown or a roof leak, they would not have enough money to cover the costs.

You should have 3-6 months of expenses in an emergency fund. Set aside 5% of your income to cover unexpected problems. This will help you sleep better at night.

15. Setting Unrealistic Goals

Although it is possible for you to become debt free, it may not be something that can happen right away or without making some changes. For example, it is usually better to pay off debts one at a time rather than trying to pay them all off at the same time.

One way to pay off your debts is by using the debt avalanche method. With this method, you would pay off your most expensive, highest-interest debts first, and then move on to the next most costly debt. This could take some time, but it is more realistic than trying to pay off all of your debts at once. Some people prefer the debt snowball method, where you pay off your smallest debts first in order to gain momentum.

16. Not Verifying Your Credit Report is Correct

Approximately 34% of Americans discovered at least one mistake on their credit reports, as indicated by a 2021 study by Consumer Reports. If you don’t report a credit dispute, you may end up paying for somebody else’s blunder.

Review your credit reports from the three major credit bureaus annually. Check for errors that could lower your credit score and make it harder to get a loan, such as delinquencies or incorrect balances.

17. Not Increasing Your Income

Having enough income to cover your expenses is key to paying off debt. If you can increase your income, you’ll be able to pay off your debt more quickly.

Translation: Studies over many years have shown that people’s ability to pay their debts is mostly determined by how much extra money they have available – even if that is the only factor. You may be able to increase your income by making your savings work harder. Another way to earn more is to have a second job on the side. Wherever the extra money comes from, having more of it means being able to pay off debt more quickly, and also makes it less likely that you will fall back into debt in the future.

Best Way to Get Out of Debt

First To get started, here are a few steps that are worth repeating.

• Check your budget – There always are areas where you can shave a few dollars free and create extra cash to apply to the debt. One less night eating out (at least $20 saved). Take your lunch to work every day (at least $20 saved). Watch the movie or sporting event at home (at least $20 saved). Skip Happy Hour ($20 saved).
• Bury your credit card – That’s what got you in trouble. Keep one in your wallet for bonafide emergencies. Pay for everything else in cash. It’s a LOT more difficult to hand over a $100 bill than it is a credit card. Impulse buying almost disappears when you pay everything with cash.
• Go shopping with a list – A grocery store or shopping mall is a dangerous place when all you take is a credit card. Make a list of what you want. Only buy what is on the list. Get in, get out. And never go grocery shopping when you’re hungry. Even Spam looks tempting on an empty stomach.

Bottom Line

There are other things you can do wrong when trying to pay off debt, like taking out a loan with your house or other assets as collateral. This could result in losing what you put up as collateral if you can’t make payments on time. But, these are some of the most common mistakes people make. If you avoid them, you’ll probably have an easier time paying off debt and be happier.

What have you done to successfully pay off debt? Are you part of the Debt-Free Society? Let me know in the comments!