Swimming in debt isn’t fun, but it’s pretty typical. For instance, according to the financial website NerdWallet.com, the average American household has $15,310 in credit card debt and has $132,086 in overall debt.
But drowning in debt can be a nightmare.
And if that’s the case, keep in mind that whatever you’re doing to reduce what you owe may actually be pulling you further underwater. So if you’re trying to pay off a lot of loans, make sure you aren’t making these mistakes.
[See: 10 Easy Ways to Pay Off Debt.]
Not having a coherent plan. You need to have much more than a strong will and fervent desire to kill off your debt. A reasonably well-crafted plan is key if you actually want to eliminate what you owe, says Cherie Lowe, an Indianapolis-based blogger who writes about saving money at QueenOfFree.net.
Your strategy doesn’t need to be complicated. In fact, it really comes down to this: “You need to make more money and spend less money,” she says.
But you do have to know how you are going to accomplish that.
“It’s not enough to wish away debt. … You’d never want your pilot not to have a flight plan. You wouldn’t run a marathon without training first. You need to do more than want it to happen,” Lowe says.
Otherwise, like the pilot without a flight plan, you could end up, well, anywhere.
[See: Spend a Windfall Wisely.]
“Fixing” the problem without fixing your behavior. When consumers get in trouble, they often take out a consolidation loan or move their debt to a lower-interest credit card, says Abby Eisenkraft, CEO of Tax Choice Solutions, a New York City-based tax preparation and representation practice. Eisenkraft, however, works with many clients to set up plans for getting out of debt.
And while a consolidation loan or a low-interest credit card can work to solve a debt problem in theory, it rarely works out that way, according to Eisenkraft.
“Since they never work on changing the original behavior, they run up the cards they had previously cleared,” she says.
Sometimes debts will be “fixed” in even worse ways, she adds.
“We also see people cashing in their 401(k) plans at work, and IRAs to pay credit cards. And of course, they get the cards maxed out again and now have no retirement savings and must not plan on eating later in life,” Eisenkraft says. “Even when the debt gets old, and they negotiate a fraction to pay in a cancellation of debt, they are always back in the same situation.”
Rebecca Schreiber, a certified financial planner in the District of Columbia, sees consumers trying similar but often futile tactics.
“One of the biggest mistakes I see people make is using a home equity line of credit to pay off credit card debt,” she says. “It looks like an easy out — taking a tax-deductible loan on your home going up in value, but most people run their cards right back up again. Now their homes are on the line, too, and they’re back to square one.”
[See: How to Live on $13,000 a Year.]
Believing there’s a quick fix to your debt. There isn’t. There’s no pot of gold at the end of the rainbow. If you wire a stranger a thousand dollars, you won’t erase a $20,000 debt.
Howard Dvorkin, a certified public accountant and chairman of Debt.com, says, “The single biggest mistake I’ve seen repeatedly in 20 years can be summed up like this: believing ridiculous get-rich-quick schemes and doubting legitimate get-out-of-debt programs.”
He adds that when he talks about legitimate ways to get out of debt via programs that credit counseling agencies or the government offers, “people look at me skeptically — even when I tell them to consult the Department of Education and the Better Business Bureau.”
Working harder to find a way to erase the debt than actually paying it off. There is nothing wrong with contesting your credit report if you believe it has incorrect information.
But Frederick Towles, an accountant and finance coach in New York City, has seen people use information they’ve picked up in dodgy places like credit repair infomercials, and they’re suddenly spending a ton of time writing to credit bureaus and bombarding them with information, hoping to use loopholes to clean up their account.
“Let’s face it. If you opened the account with a creditor [and] use their money, the debt is yours. Own it, deal with it and pay it,” Towles says.
Not reading the fine print when you try to pay off debts. So you’re taking out a consolidation loan or a home equity loan or transferring your credit card balance to a lower-interest credit card? You need to worry more about your spending habits and debt-reduction strategies.
You also should scrutinize the fine print in these loans, warns Matthew Zimmelman, a consumer bankruptcy attorney with his own practice in Valley Stream, New York.
And Zimmelman’s advice ties in with the earlier point that there is no easy way out of paying off a significant debt.
“People are very quick to jump to a bank loan or consolidation loan to pay down the debt in one payment,” Zimmelman says. “They don’t always read the fine print or focus on how that monthly payment will weigh them down for the next several years, or how the consolidation company collects fees from every monthly payment. Be careful.”
He adds that you should be especially wary about debt consolidation companies.
“There may be some very reputable companies, but the people who come to see me bring bad experiences with some of these debt consolidation companies,” he says. “I’ve seen many cases and news reports where people were scammed by someone pretending to offer debt consolidation services.”
But other lifelines can be risky, even legitimate ones, Zimmelman says. He cites the problem of interest rates climbing after initial teaser rates end, and of compound interest obliging consumers to pay more than double what they originally owed.
“People will jump on a balance transfer offer from a credit, but you’re just borrowing from Peter to pay Paul,” Zimmelman says.
And the problem with that, according to Zimmelman: “Paul charges interest, too.”
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Trying to Dig Out of Debt? Don’t Make These Mistakes originally appeared on usnews.com
