Think you’re paying your debt down perfectly? Or are you guilty of committing some (very common) debt payoff sins? In this article, we’ll go over some of the biggest mistakes people make when trying to pay off their debt. So grab your loan payoff calculator and a cup of coffee (or a cocktail—we won’t judge) and let’s get to work.
Biggest debt payoff mistakes
1. You don’t change your spending habits
Not changing the habits that got you into debt in the first place is a huge mistake. If you keep spending in a way that prevents you from saving money—whether that’s constantly buying Starbucks or trying to keep up with the Joneses by buying the latest fashions—you’ll never get off the debt hamster wheel.
2. You don’t create a budget
If your current budget plan is just a hopeful shot in the dark that you’re spending well, you need a new plan. It will be close to impossible to get out of debt if you have no idea where any of your money is going. To create a budget, first compare your post-tax income against your monthly expenses. If you’re spending more than you’re saving, it’s time to cut out the non-essentials.
3. You try to pay off everything at once
If you have multiple debts, it can be tempting to want to tackle them all at once. However, this isn’t a good strategy. A better plan is to follow a debt payoff strategy so you have a plan of attack you can follow. Two strategies you can consider are the debt snowball and debt avalanche methods.
• Debt snowball: With the debt snowball method, you’ll continue paying the minimum amounts on all your debts, but you’ll put extra money toward the debt with the smallest amount. Once that’s paid off, you’ll put extra toward the debt with the second smallest amount. The debt snowball is very motivational since you can watch your debts disappear one by one.
• Debt avalanche: With the debt avalanche, you’ll also pay the minimum amounts on your debts, but extra money will instead go toward the debt with the highest interest rate. Once that’s paid off, extra will go toward the debt with the second highest interest rate. The debt avalanche is best for saving money overall since you’re kicking those high-interest debts to the curb.
4. You don’t think about the future
While getting out of debt ASAP is a great plan, it’s also important to set some money aside for your future, e.g. with a retirement fund. The earlier you start putting money aside into a 401(k) or other retirement account, the better off you’ll be down the road.
5. You don’t think about the unexpected
Sure, you probably don’t want to think about having to deal with unemployment or expensive medical bills. But the unexpected can happen and setting money aside for an emergency fund is a smart move. Otherwise, you may find yourself going back into debt to pay for high-ticket bills.
6. You think you have it go it alone
You don’t have to do this alone. For example, you could look into debt management programs, where you’ll work with a credit counselor who can help you consolidate your debts and negotiate your interest rate.
7. You don’t check your credit report for errors
Checking your credit report for mistakes is an important part of paying off debt. Credit report mistakes can hurt your credit score and affect your ability to get approved for a loan.
8. You don’t know your ‘why’
Knowing your financial why, whether that’s saving money to buy a home or go on a dream vacation, can help you stick with your debt payoff plan. What’s your biggest goal, besides becoming debt-free?
9. You’re waiting for the perfect time
There is no perfect time to start paying off your debt. Waiting for a promotion and/or raise at work could mean that it’ll take years before you start tackling your debt. The best time to get started is today.
10. You close old accounts
You’ve finally paid off your debt: congratulations! You’re probably excited to close that account and never think about it again. But not so fast. Closing credit card accounts can negatively affect your credit utilization ratio, which is the amount of credit you’re using compared to the amount of credit you have available. Keeping old, unused accounts open will lower your ratio and subsequently boost your credit score.
Hopefully, you’re not guilty of too many of the above mistakes. And if you are? Don’t sweat it. Taking small steps today to improve how you pay off your debt can mean a better financial future tomorrow.
By Stefanie Gordon
Stefanie Gordon is a content strategist with over a decade of professional writing experience. She is a former financial journalist who has spent the last several years working in digital marketing. She specializes in content strategy and creation for large and small businesses in finance and technology.
