5 Mistakes You Might Be Making While Managing Your Debt

No debt is created equal. That being said, there isn’t any one-size-fits-all solution on how to manage your debt and avoid excessive fees, interest and other penalties that you’ll be paying if debt is not handled properly.

As such, here are five mistakes that consumers usually make when it comes to their debt, as well as ways to avoid them.

1. Depleting Your Emergency Fund

If you do have a substantial amount in your savings account, using a vast majority of it to pay off debt may seem like a wise thing to do. However, this approach fails to get to the bottom of the problem. Your ultimate goal is to get out of debt and to stay out of it, not to just simply write a fat check that will serve as your temporary solution. It is much more sensible to kick-start your management efforts and change your spending habits as emptying out your emergency funds can result in an even greater debt in the event of an emergency, and you are left with nothing to cover the costs.

2. Having No Action Plans

Taking a relaxed approach to managing your debt is definitely a recipe for disaster. You could eventually achieve your goals, but it may take much time and effort. Imagine a college student who randomly takes courses that appeal to him, without actually looking at their transcript to check if he even needs it to graduate.

Save yourself the wait and devise a detailed and organized debt repayment plan which incorporates your financial goals.

3. Getting Stuck in the Minimum-Payment Trap

Paying the minimum every month could provide you more flexibility when it comes to your budget, but this also means that you will likely never get out of debt. Most of the time, particularly if your outstanding balance is high or near the limit, minimum payments may only cover the interest, which leaves your principal balance untouched.

Rather than making this mistake, plan your budget in a way that you can pay more towards your monthly payment. As much as possible, pay it in full or more than half the minimum, to ensure that your payments are not being made in vain.

4. Borrowing to pay

Borrowing money from one debt source to pay another only for the purpose of meeting monthly payments could lead to a bigger financial concern than what you initially started with. If your financial situation is terrible and you're just opening a new line of debt to close an old one to make monthly payments, you can reach out to the creditors you owe money to and ask that they grant you some kind of temporary reprieve until you can sort things out. Moreover, refrain from enlisting any sort of financing to pay for your purchases unless it is necessary.

5. Ignoring Statements and Credit Reports

Both your balance statements and credit reports give a picture of where you are when it comes to your debt obligations. Ignoring these can be costly and time-consuming if any inaccuracies exist as errors that are not immediately reported may become more difficult to dispute in the long run.

To avoid these kinds of issues, you should immediately review your account statements every month to validate their accuracy. Should discrepancies exist, you need to report them as soon as possible to the credit company to resolve the issue before the inaccuracy is reported to the credit bureaus. Also, you should review your credit report for at least once in every four months to check for mistakes.