Reducing bad debt is easier than it sounds, but it requires a lot of sacrifice, discipline and planning. When it comes to paying down existing debt, many become trapped in self-deceptive practices that do little to mitigate the problem, and instead prolong it. Here’s five examples of bad debt reduction habits that you can identify and take steps to avoid in order to become debt-free within record time.
#5) Extended Car Loans
Buying a new car means paying out the second-largest expense in your life next to your mortgage. Naturally, a little planning and consideration goes a long way here. Most people are attracted by the lower monthly payments of a car loan over a lengthened number of years, but this can hamper your debt reduction and actually serve to pile more on. Total borrowing cost should be the focus rather than the monthly payment. If that total cost seems outrageous when you take a good hard look at it, then perhaps it’s better to consider a different payment scheme, or an entirely different vehicle better suited to your needs. Dealerships will focus primarily on the monthly payment in order to get cars off the lot. When coupled with the desire to have a flashy new car in the driveway, this combination can equate to seriously bad long-term financial planning. Remember that a car is a luxury item, not a necessity. While it can have a tremendous impact on our lives, that doesn’t mean you should spring for a fully-loaded ultra-expensive model when a cheaper alternative will do the job just as well. This bodes especially true if you have other debts to consider, like student loans or a mortgage.
#4) Credit Cards For Every Little Thing
If you want to reduce debt, it’s best not to rely on the very thing that contributes to it. Credit cards can be handy, but they’re a slippery slope that can lead to piles of unnecessary debt, especially where interest rates are concerned. Irresponsible spending can fill a credit card’s limit to the brim, leading some to double down by using one credit card to pay off another. If left unchecked, the madness becomes all-consuming, which is why it’s important to identify the problem and create a red-line in the sand where no purchase shall be permitted to cross. Credit cards are best used for single purchases or emergencies, rather than every little purchase under the sun. Bear in mind also that regular, responsible use of a credit card can yield amazing credit score benefits. If you make payments on time and wipe out your debts faster than expected, creditors and banks will take immediate notice and bestow favoritism upon you.
#3) Minimum Payments
If you’re making minimum payments on your credit card, you may be holding the credit score monster at bay, but you’re doing very little to reduce your debt. Minimum payments cover only a little more than your accrued interest, which means it’ll be years before you manage to pay it off. Not only does this have very little effect on your debt, but it sacrifices valuable money that could be used to wipe out the expense far quicker. Consolidation loans are similar, but minimum payments over an extended period of time can force banks to take action if they feel like the debt load is just sitting there and not budging. Either way, it’s unwise to focus on minimum payments when a bit of short-term sacrifice can free up funds to whittle down your debt and get you one step closer to financial freedom.
#2) Extending Your Mortgage
Mortgages are the most challenging of debts to pay off next to college and university tuition fees. A house can’t be sold as easily as a car in order to wipe out the debt, due to the fluctuating nature of the market, which leads many to consider extending their amortization beyond their initial term. This can produce an effect similar to longer-term car loans – lower monthly payments spread out over an increased number of years. The excitement diminishes quite fast when you take the time to calculate that out, however. Consider extending amortization on a mortgage from 20 to 25 years. Factor in the lower monthly payments versus the extra 5 years of payments. Consider an alternative measure, such as changing your payment schedule from monthly to bi-weekly so you can better keep track of your expenses, and potentially throw some more money at it when there’s a surplus. The allure of loosening the belt over an extended payment period is usually nothing more than a mirage in the desert of debt.
#1) Spending Beyond Your Means
This is the pinnacle of practices to reduce bad debt, and one frequently associated with all the other points on this list. It’s the epicenter of where debt loads spiral out of control and become a tremendously difficult beast to manage. It all starts with responsibility. Many of us are prone to falling victim to the little voice that encourages us to spend without a care, and that means discipline is required to keep ourselves in check. Rule number one of debt reduction – if you don’t have the money, don’t make the purchase. Sometimes this rule must by definition take a backseat depending on the type of purchase such as a house or car, but what about that glorious $5,000 4K television, or that fancy new $1000 smartphone? Can you afford it outright? If you have to fall back on credit, then it’s best to spend within your means, and not beyond.
Planning for a sound financial future isn’t as hard as it seems, and reducing debt is one step towards building your wealth and putting you in a great financial position.
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