If you're drowning in credit card debt, take a step back look at your day-to-day spending habits and then re-assess them. Knowing your weaknesses could help prevent you from falling further into debt and show you a light at the end of the tunnel. Chase Peckham, Director of Community Outreach at DebtWave Credit Counseling, a nonprofit Credit Counseling company, says, “Consumers who are living with debt often make very common financial missteps, most of which they can overcome with discipline and spending behavior changes”. Here are some of the most common mistakes people make with credit cards.
1. Balance transfer roulette (be careful!)
Transferring balances on high-interest cards to lower-rate cards can be an effective technique, but it's easy to make what seems like a good idea a nightmare. Transfer a balance onto a card with a low introductory rate and you can potentially save money on interest if you refrain from charging more on it and focus on paying off the balance before that introductory rate expires. Most people continue to charge on the new card and wind up with more debt once the teaser rate expires. In reality, new purchases are set at a separate interest rate, typically higher than the original! Read the fine print very carefully, and attempt the balance-transfer only if you can control your spending.
A plan: If you can't refrain from charging more to the card, balance transfers won't get you out of debt. If you're really in a pinch, consider getting a part-time job and dedicating your paycheck to your cards or other high interest loans. If you can’t find time to do that, go back to your budget and cut back on unnecessary expenses such as dining out or paying crazy cable bills. As much as I love Entourage, I can wait for the DVD. Put the money you save toward paying off your balances.
2. Not checking credit reports annually
You need to check them! If you have credit cards, or other debts, pull your credit reports at least once a year and check it for mistakes. Clearing your record of inaccuracies can be the difference between a low interest rate and an extremely high one, getting hired for a job, stopping identity theft or ruining your credit rating from mistaken identity. The scores on your credit report also determine if you’re a risk to lenders for future loans (cars, home, land, cell phone, cable, etc.) Dispute anything you think should not be there. The Fair Credit Reporting Act allows for the correction or deletion of inaccurate, outdated or unverifiable information, provided the investigation into the allegations are true. Negative but true information stays on your reports for up to seven years, however, a Chapter 7 bankruptcy filing will remain for 10 years.
A plan: You’re able to receive one free credit report from each of the three credit reporting bureaus, TransUnion, Equifax and Experian, every year by going to a federally set up web site, annualcreditreport.com. Why should you? Errors on your report, such as a payment showing late that really came in on time can lower your credit score affecting your interest rates and your ability to obtain credit in the future. If you do find a mistake, send a correction letter to each of the credit bureaus that show the error. All three allow you to dispute errors online. “A great majority of people don’t have a clue to what is on their credit reports,” according to Chase Peckham, “this is a huge mistake and could be costing them thousands of dollars in high interest rates”.
3. Making the minimum payment only
Paying the minimum is better than paying nothing, but it doesn't do much to pay off most balances and forces you to keep paying interest. By paying interest, you lose any savings from buying products on sale.
A plan: Of course if you can afford to pay more than the minimum or in full, go ahead and pay as much of the balance as you can. You never know when you're going to have a tough month. However, if paying more than the minimum is a monthly problem, then you need a game plan. Like in a debt management program figure out what the minimum is on each card and pay that number. Then the next month pay that number again, an again the next month and so on and so on. What this does is pay more and more towards the principle each month. Each month you pay, the minimum payment asked for the next billing period will go down, so each month you pay less interest and more towards your principle saving you years and possibly thousands of dollars in interest. The only thing that can throw this off is, the credit company raises your interest rates while you’re making progress.
4. Paying bills in no particular order
While the order may not matter if you can pay all of the balances, it will matter if you fall short one month. Say you pay off the balances on your credit cards first then you find you can't make the minimum on your house payment or monthly rent. You've put the roof over your head at risk.
A plan: Always pay for living expenses first. After the house or rent payment, necessities such as utilities, groceries and medical care should top the priority list. Next, comes’ the car payment, secured loans and co-signed debts, then unsecured loans and credit cards. Work out a bill payment schedule and set aside money from each paycheck.
5. Making credit payments late
After all, it's only a $39 late fee, right? Besides wasting money you could've put toward the balance, a payment that arrives even 1 day past due can throw your account into default and triple your interest rate. Plus, other creditors may start charging you a default interest rate as well, thanks to a universal default clause buried in your contract.
A plan: On a calendar, mark upcoming paydays and payments that should come out of your paycheck. If you're mailing payments, send them at least seven to 10 business days in advance. The best and thing to do is sign up for online bill pay using your routing number and bank account number, not your debit card. Just check that the address on file and the address on the statement match, or the payment might not arrive on time. If you're still late, call the creditor, explain the situation. They may waive the late fee. Check your credit report and be sure the information shows up correctly.
6. Using the Credit instead of paying in cash or with a debit card
How many times have you charged something on your credit card when you had the money to pay with cash or debit? Got to keep that cash in your pocket! Insignificant purchases of $20 to 25 and $40 made several times over can quickly add up, especially if you already carry a balance. Balances you can't pay off each month mean paying interest charges and, subsequently, more money for items you could have bought outright, interest-free.
A plan: Make a habit of paying for purchases under $50 with cash, debit or check. Knowing that the money has to clear the bank sooner could help curb your spending habits. Just be sure to check your balance regularly to ensure that you have enough funds.
7. Using retail store credit cards to make use of discounts and not paying them off
Chances are those store cards we love carry a high interest rate you'll be forced to deal with if you don't pay off your balance each month. This high interest rate will cost you a lot more than the 10% you saved on the store purchase. If you carry a balance and the interest rate is 23.99% then you’re paying more than double what you saved on the original 10%. Use store cards only if you know you can pay off each billing period.
A plan: If you must charge your purchase, use your general-purpose credit card. If you can't pay off the balance, at least you'll pay a lower interest rate. Good rule of thumb, don’t buy it if you can’t pay it off or afford it with cash.
Budgeting
8. Thinking of 'budget' as a 4-letter word
To most people it is a 4-letter word, but everyone can benefit from analyzing what they spend their money on, how much and then, sticking to the amount. It also makes sense to budget for known future expenses, retirement, kids’ college, vacations, etc. Not saving income in advance means you'll have to charge expenses or cut into funds set aside for necessities.
A plan: To find out where your money is actually being spent, keep track of where your money goes for a month. Save receipts and compile this information into a spreadsheet or financial software. You can even use a plain old pen and paper to categorize your expenses. This will reveal whether you're spending too much on things you want versus what you need, such as lunches out with friends versus gasoline for your car. This doesn’t mean you have to give up the things you enjoy, just that you can control how much you’re doing them. It has everything to do with allotting amounts for each thing and adjusting as necessary.
9. Not Planning for Yearly Expenses
You plan for typical ongoing bills expenses: groceries, utilities and gasoline. But oops, you forget about yearly expenses, like car insurance and property taxes.
A Plan: For planning purposes, simply divide yearly lump sums by 12 and allocate that amount for annual expenses every month. Yes, it's easy to forget about bills that don't show up at your door every month, but you're probably better off paying the total bill at once, since most companies levy an extra charge for monthly payments. Remember to also plan for other non-monthly expenses, like school supplies, pet care and gifts.
10. Not Tracking Past Expenses
A good way to get a handle on irregular expenses is look at past expenses. These are usually things that we forget about that can get us into trouble as the year goes on.
A Plan: How often you went to the doctor or mechanic last year can indicate how much you'll go next year. Plus, some costs are seasonal. Gas and oil bills are higher in the winter, and electric bills are frequently higher in the summer when air conditioners run.
11. Not Being Flexible
You don't have to be too crazy with following the budget to the letter. Sometimes things will happen that can throw the budget a little out of whack. It happens! We need to be a little flexible with the budget and be able to move things around from time to time. Life happens!
A Plan: Trade amounts around in different categories. For instance, spend less on eating out in one month and buy some new clothes the next. Sometimes you have to reward yourself as well make decisions that are best for yourself or the family.
12. Procrastinating on creating an emergency fund
Learn to save for financial emergencies. A trip to the emergency room or car accident could force you to put large balances on credit cards, causing interest to accrue and more debt to pile up. For instance, if your tire goes flat and you can't pay upfront for the replacement, you're stuck with charging it or reducing funds earmarked for necessities. Emergency funds are essential.
A plan: The general rule is to maintain an emergency fund of at least three to six months' worth of living expenses, and keep your insurance policies up to date. Work toward that goal by putting away 10% of your take-home pay each month in a liquid savings account. If you receive a raise or bonus, add that money to savings. Since you're not used to the extra cash flow, you won't miss it.
Using Retirement to Pay Off Credit Card Debt
13. You'll still have debt
Let’s say you use a 401(k) loan to pay off your debt. You’ve eliminated one debt and now you have another. The only thing you’ve changed is who you owe and maybe your interest rate. If this were the only drawback to borrowing from your 401(k), the benefit of a lower interest rate might be worth it. But, there are other risks and reasons that this solution unwise.
14. Time will work against you
Long-term investing (such as saving for retirement) is based on the idea that, by putting time to work on your behalf, your money will grow. Most calculations suggest that your money will double, on average, every eight years. 401(k) plans permit each loan to be held for up to five years or longer. Therefore, if the loan is used to fund a first-time home purchase, loan holders not only lose out on what should have been an opportunity to nearly double their money, but they are also left unable to make up for the lost contribution and growth opportunities. Over time, their balance is unlikely to ever reach the total that it would have reached had they not been touched.
15. Your take home pay will be lower
You’ll repay your 401(k) loan through payroll deductions so your paychecks will end up being lower, putting more pressure on your budget. This can make a bad situation worse if you’re already having trouble making ends meet.
16. Leaving your job will be expensive
If you leave your job, you’ll have to repay what you borrowed from your 401(k) within 60 days or face early withdrawal penalties and income taxes. If you withdraw from your 401(k) before you turn 59 1/2 you face a 10% penalty. That’s $2,000 on a $20,000 loan.
17. Your retirement savings will be put on hold
Borrowing from your 401(k) could reduce your overall retirement potential. Some plans won’t allow you to contribute to your 401(k) until the loan has been repaid. So if you typically put in $500 a month and it takes you 2 years to repay your loan, you’ll missed out on $12,000 in contributions. Not only do you miss the contributions, you miss the interest earnings you would have gained on what you borrowed and what you would have contributed.
18. You could end up in a higher tax bracket
If you were maxing out your 401(k) contributions to put you in a lower tax bracket, you won’t receive that benefit after you take out a 401(k) loan. Your payments to the loan are taken out post-tax and you can’t claim them as a deduction on your tax return. In fact they will be submitted as income which will be added to your total earnings for the year.
Disclaimer: The information outlined in this flier may not be suitable for every individual, and are not guaranteed or warranted to produce any particular results. No warranty is made with respect to the accuracy or completeness of the information contained herein, and DebtWave Credit Counseling specifically disclaim any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this flier
