According to WalletHub, consumer credit card debt is approaching pre-2008 levels; a sign that Americans are once again over-leveraging themselves and putting their long-term financial wellness at risk. With interest rates projected to continue rising, it’s a bit of a double-whammy. Even a quarter percent hike could cost the average household hundreds of dollars in additional interest.
The “b” word is starting to be uttered a bit more (i.e., “bubble”) and I can’t help but think that now is the time to shore up your finances while times are still good. One way to prepare for a possible bubble burst (which could come with potential job losses, stock market losses, and a housing market slow down) is to get rid of that credit card debt and create more freedom in the budget. However, there are common mistakes that people make when embarking on a debt-free mission that often lead to even more debt. If you’re ready to buckle down and get rid of that monthly balance, make sure you avoid these five mistakes:
1. Neglecting to address the root cause of the debt first. Most credit card debt stories start one of three ways:
- A job loss that didn’t lead to any spending cuts.
- An unexpected avalanche of “random” expenses like vet bills, travel for family emergencies, car repairs, etc.
- Reimbursable work expenses that come in after the bill is due and aren’t applied against the balance.
Before you can really implement a debt reduction plan, you have to first address the reason you got into debt in the first place. This is typically a lack of an emergency fund compounded by living beyond one’s means.
First, you have to find a way to make sure you’re spending less than you make each pay period while also setting aside an amount each month to build up that emergency fund. This might require temporarily canceling services like cable, taking a break from dining out or even selling a lesser-used car. It may also require some lifestyle adjustments if you’re serious.
2. Continuing to use cards while paying them off. I have seen so many people try this, thinking they would just pay off the new charges each month plus an added amount toward the old balance. It’s often driven by a desire to earn credit card rewards like airline miles or cash back. I don’t care what kind of recordkeeping system you try, this never works, and the resulting extra interest far exceeds any rewards you earn. You have to stop using credit cards in order to pay them off. No way around it.
3. Using low interest promo offers to pay off old cards, then running up the new card. When done correctly, using cards with promotional balance transfer offers can be a great way to expedite your debt pay-off plan. Where it goes completely off track is when people either continue to use the card that was paid off or use the new card for purchases, thinking they might as well take advantage of the low promo rate. See point number 2. If you really want to get out of debt, you have to stop using debt in order to get there. Then use the Debt Blaster calculator to make your plan.
4. Worrying too much about their credit score. Your credit score really only matters when you’re trying to borrow money and sometimes when applying for a new job. When working on a debt pay-off plan, the primary number you should be focused on is the total balance of your debt (and making it go down), which will naturally improve your credit score. Carrying a balance on your credit card is not required to boost your score. It’s the ratio of your balance to the limit and the timeliness of your payments that matter.
