Top Five Get Out of Debt Mistakes
I cannot get enough of CNN and talk about the economy. I’ve always been interested in ways to improve my finances. Like most people, I’ve made some serious money and credit mistakes. I acquired three credit cards after graduating from high school; and in less than a year, they were maxed out. I spent that first year of adulthood spending money I didn’t have and living way beyond my means. But unlike most people, it didn’t take five or 10 years to recognize my mistakes. I paid my bills on time every month, so the issue wasn’t bad credit. Still, my future plans included buying a new car and eventually a home. And for a lender to take my application seriously, I needed to make some changes.
But there are good ways and bad ways to get out of debt. I didn’t study personal finance or Credit 101 in school, and some of the decisions I made on my path to debt-free living caused more harm than good. Interestingly, the mistakes I made (and the ones I almost made), are shared by many debtors. There isn’t a single right way to eliminate debt and improve your finances. But some strategies that seem logical in hindsight can actually knock a few points off your credit score. Here’s my list of the top five debt-reduction steps to avoid.
1: Closing Credit Card Accounts
At one point, I had about eight credit cards. They weren’t all maxed out, but each card had a balance. Finally, I had enough and I paid off three of the balances. Rather than cut the cards in half or lock them in a drawer, I immediately contacted each creditor and closed the accounts. It felt so liberating…until I checked my credit report a few months later and received a nice surprise. Closing the accounts reduced my credit score by 30 points! Why? Many factors influence credit scoring such as credit length and available credit. Reduce both, and your score takes a nosedive.
2: Hiring a Debt Consolidation Agency
Because I didn’t have a lot of disposable income, I considered hiring a debt consolidation agency to reduce my debt. But after researching these programs I decided it wasn’t the best route. Most agencies charge an up-front fee, and there are no guarantees. Plus, debt consolidation agencies freeze your accounts and you don’t have access to credit. But the one thing that really turned me off: original creditors report “third-party assistance” to the credit bureaus. This seemingly innocent remark can frighten future lenders, and it’ll appear as if you can’t manage your own finances.
3: Accepting a High Interest Rate
Anyone who’s serious about debt elimination needs to grab their credit card statements and look at their interest rate. Is it high? If so, contact your creditors and ask for a lower rate. This method won’t work for everyone. But if you’ve been a loyal customer for years, and have an impeccable payment history, you deserve a better rate. Credit card companies need your business, and they would rather lower your interest rate than lose you to a competitor.
4: Applying for a Home Equity Loan
A home equity loan lets you tap into your equity, and you can use the money for debt consolidation. It’s an easy and quick way to reduce debt. So, what’s the problem? The truth is many homeowners have little self-control. They obtain a home equity loan, use the money to pay off debt, and then they acquire new credit card debt. Debt becomes a vicious cycle that keeps repeating itself.
5: Paying Just the Minimum Payment
It’ll take approximately eight years to pay off a no-interest credit card with a $1,000 balance. Add 15 to 20 percent interest on top of that and you’re looking at 20 to 30 years. Paying just the minimum is enough to keep your credit score afloat, but it isn’t enough to reduce the balance.
What are some tips you have for surviving the credit crunch?
Look for more tips on money and personal finance from Valencia soon!
Photo by Digiart2001.