Paying your debt is the single best way to improve your financial condition. As so, when you become debt-free, you won’t have to pay interest to creditors. All that money which 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 acquisitions that can improve your net worth, such as buying a home or an office with a mortgage loan.
Blunders during debt payoff are common and they can disrupt your efforts to improve your financial life. Here are some of the most common errors that you should make sure to avoid.
1. Not having a payoff plan
Knowing that you want to pay off debt often isn’t enough to be successful at such a challenging endeavor. Instead, it’s best to set defined goals and have an exact plan for how you’ll tackle this financial task. You should decide:
• Which debt you want to pay off early as Mortgages and student loan debt, for example, come with tax breaks? They usually have low-interest rates so it may not make sense to pay them off ahead of schedule.
• How much money you can dedicate to debt payment? You’ll need to pay extra than the minimum you owe if you want to make progress in becoming debt free. So set up a budget, look for ways to cut expenditure, and decide how much you can afford to send your creditors each month.
• How much you owe in total. If you don’t have an idea of exactly who you owe and how much you owe, it will be much tougher to make an effective plan to become debt free.
2. Spreading around your money too much
When people start paying off debt, occasionally they send a small added payment to each creditor. Unfortunately, this method can take you a long time to see real advancement 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 choose one debt to send your extra cash to. That way this debt can be paid down faster and eventually be eliminated. Thus, you’ll have fewer creditors you will have to deal with.
Another method, if you don’t want to worry about choosing which order to pay off debts, is to unite your debt. This would include taking out a new loan at a reduced interest rate and using the proceeds from it to pay back numerous 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 effortlessly be able to see how your payoff efforts are going.
3. Not tracking your progress
Monitoring your debt repayment efforts is significant for two big reasons. One, keeping track of your progress keeps you motivated. As you see your debt balance decrease, you’re much more likely to continue making sacrifices to pay more. You may even be enthused to pick up a part-time job or work overtime to earn more extra cash to put to debt repayment.
Tracking your progress is also significant. If your payments are hardly making a dent in the principal since so much of your funds are going toward interest, you’ll need to make a change. This could comprise refinancing debt at a lower rate of interest, increasing the payments, or even considering severe decisions such as debt clearance or liquidation if you’re in over your head.
4. Working on debt payoff with no extra emergency fund
It may seem counterintuitive to save money for emergencies when you want to dedicate every penny you make to debt repayment. Unfortunately, if you don’t have money set aside when unexpected expenditures arise, you’re likely going to have to loan it again when a problem inescapably requires you to spend.
If you are regular on debt repayment and suddenly you have to put a huge bill on your credit cards as of a financial emergency, you’ll undo all your efforts. You could get stuck in a never-ending cycle and speedily lose momentum. To make sure this doesn’t happen, save a small emergency fund and then get serious about giving extra money to debt payoff.
5. Continuing to get deeper into debt
Having an emergency fund is significant to avoid going deeper into debt but unanticipated emergencies aren’t the only reason why you might disrupt out your credit cards to keep borrowing. If you don’t spend under control and aren’t living on a budget, you may be interested to turn to your credit cards for big purchases or even to cover ordinary costs such as groceries or gas. So, you must stop borrowing when you’re working on debt repayment.
If you are accountable enough and trust yourself to pay off what you charge on your credit cards every month during the debt payoff procedure, you can keep using them. But for countless people, it’s better to shift to cash only till your cards are paid down. That way you won’t be making your debt bigger even as you try to repay what you previously own.