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7 Biggest Mistakes People Make When Paying off Debt

IndianMoney.com Research Team | Posted On Tuesday, January 28,2020, 05:25 PM

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7 Biggest Mistakes People Make When Paying off Debt

 

 

Paying off debt improves your financial situation. The advantage of paying off debt is that all the money you were spending on paying interest now stays with you.

Paying off debt is not a mere process of returning the money owed. It involves several other processes like limiting spending, making a budget, prioritizing debt repayment, creating a contingency fund and much more.

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7 Biggest Mistakes People Make When Paying Off Debt

In a hurry to pay off debt, people often end up making mistakes. 7 most important mistakes to be avoided are:

1. Improper Planning

After making the decision to pay off debt, do not start doing it without proper planning. Proper planning will prove to be more effective in paying off debt. It is essential to set goals and meet them within preset time periods. This ensures your debts are covered within a time frame. Important points to remember while making a plan are:

See Also: 7 Steps for Financial Planning for Young Adults

  • How much you owe in total: There must be a clear picture on how much you owe in total. This is the basis of planning. It gives a clear understanding on how much you must keep away each month to pay off debt, and for how long.
  • How much money you can contribute to debt repayment: Plan ways to increase your debt repayment. Make sure you pay more than the minimum amounts. Cut down unwanted spending and contribute more towards debt repayment. This will get you closer to achieving a debt free life.
  • Prioritizing debts: Make a thorough study on outstanding debts, interest rates, penalties, tenure and so on. You can either pay off high interest loans first, so it reduces interest costs or you can use the debt snowball method and start by paying off the smallest debt first. Based on your financial position and stability, pick an efficient method.

2. No Change in Spending Habits

Without changing old spending habits, it’s almost impossible to pay off debt. Cut down unwanted expenses like eating outside. We all have a favorite coffee place to hang out. Instead, enjoy some snacks and tea at home watching TV. Inculcating these habits in your life will soon bring down expenses.

See Also: Basics of Financial Planning

3. No Proper Budget

Make a realistic budget. Keeping a budget and sticking to it, helps save a fixed amount each month. Ensure you finance the budget with cash and do not use credit of any form (credit card, loans, borrowing from friends or family) for this. Along with paying off debt, this makes sure you are not accumulating more debts.

4. Bad Credit Score

Once an account is paid off completely; make sure you don’t close it. Closing this will affect your credit score. A bad credit score affects your eligibility to avail loans or credit cards in the future. Credit score depends on not just what you owe, but also on how much available credit you have.

Maintaining an account after paying off the debt, will leave you with unused credit. This will improve credit score. Along with paying off debts, make sure you don’t ruin your credit score.

5. Trying To Pay Debt All At Once

People with multiple debts try to pay them off all at once. This is a bad move. Try to focus on a single debt first. Cut down expenses or earn an additional source of income. Using this amount, pay off debts quickly. Then go for the second loan and so on. This will help you eliminate debts quickly.

See Also: Why Women Need to do Financial Planning?

6. Not Saving for Retirement

Once you start paying off your debts, you are more likely to spend every rupee towards them. While it is good to cut down on the unwanted expenses, it is not a healthy practice to cut down on the important ones. This must be avoided. Contribute at least a small amount towards retirement. Time is the most important factor in retirement savings.

7. Not Using Debt Consolidation

Debt consolidation is a financial process of merging all the debts and paying them off. This is effective for consumers having multiple debts with high interest rates. This has many advantages:

  • Reduces the difficulty in managing multiple bills. Thereby, consumers don’t have to comply with multiple deadlines and interest rates.
  • Reduced interest rates.

Consumers often fail to use debt consolidation methods. Lack of awareness or the fear of getting into a bigger debt trap, stops them enrolling for it. This is actually effective and using it results in stress-free debt repayment.

Conclusion

All of us have one or other type of debt hanging around our neck. So you are not alone. Avoiding these mistakes will get you closer to your goal of being debt free. Make a plan, track your expenses, contribute extra payments towards debt repayment and make sure you do not borrow extra money during the repayment process. This will make you debt free within a short period of time.

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