7 Disastrous Debt Habits
| June 17, 2008 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
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Misusing Balance Transfers – One disturbing trend is for consumers to transfer balances on high interest cards to lower rate cards. While intuitively this appears to save cardholders a lot in interest, the problem arises when most people fail to pay off the balance before the teaser rate expires. Moreover, they continue to charge on the new cards. The sad truth is that several end up with more debt than they started with by playing the balance transfer game.
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Not Checking Credit Reports – You have a right to purge inaccurate records on your credit reports. According to the Fair Credit Reporting Act, you can correct or delete inaccurate, outdated, or unverifiable data on your report. Moreover, you can check your major credit reports (Experion, Transunion, and Equifax) for FREE once a year. Some people check one of these three reports every four months. Your credit score affects your interest rates for your future loans (i.e. mortgage if applicable), so its worth checking your reports for mistakes. It may save you money.
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Not Having Identity Theft Insurance – Identity theft insurance is also necessary because of the age we live in. Go with a policy that has a strong identity recovery program. That way, you don’t have to spend the countless hours proving that you did not make the fraudulent purchases: your insurance company will. Also, consider freezing your credit; it is the most comprehensive way to protect your identity. Financial guru Suze Orman talks about how to do this in a yahoo finance article.
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Not Following a Budget – One misconception is that budgets are just for people of lower socioeconomic status. However, everyone should be on a budget because whether you make $4,000 or $400,000 a year, you can still be broke! I go into a lot of detail in my series (Budgeting: Your Foundation For Wealth). By not budgeting appropriately, you’ll have to charge expenses or cut into funds set aside for other purposes.
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Not Having an Emergency Fund – Another misconception is that a line of credit (LOC) or credit card serves as an emergency fund. Well they do… just poor ones! I read on a letter on another website, where a reader was questioning the wisdom of having an emergency fund. She preferred to keep a LOC instead and had a hefty income compared to her expenses. I wrote in…
“The (main) thing that I question is whether most people are as risk-tolerant as (you) appear. For example, if an emergency occurred involving a significant loss of income, (you) would borrow on a LOC. I would guess that most people would rather use their own money than have a significant amount of debt, especially during an emergency. Additionally, the early withdrawal penalty + taxes for tapping the retirement accounts (if necessary) too soon is less than desirable too.”
Personally, I would not operate without an emergency fund. -
Charging Purchases Rather Than Paying Cash – Cash is king, and carrying some form of cash (i.e. debit cards, check cards, checks, etc) may keep you from charging expenses and save you a lot of money in the long run. David Bach (Automatic Millionaire) called it the latte factor, which refers to the fact if people would invest the same amount that they spend at Starbucks on a daily basis, they could fund retirement accounts and retire millionaires. Seemingly insignificant amounts (albeit small) do add up and may cause you to spend more.
Consider a study by Dunn and Bradstreet showed that credit-card users spends 12 to 18 percent more when using credit instead of cash.
It is probably due to the fact that people think twice about purchases when they are using their own cash. Make it a habit to pay cash today. -
Making the Minimum Payments Only – While paying minimums is better than doing nothing, it is unlikely you are making much traction with respect to decreasing the principle. Look at the following illustration by Smart Money Magazine (September, 2007)…
Say you’ve got $10,000 in credit card debt at 15 percent: if you make $1,000 monthly payments, rather than the $250 minimum, you’ll save more than $3,000
No one is saying that making large payments is easy, but it definitely supports doing above the minimum due.
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Photo by telegraph.co.uk
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A series of debt can lead to a very difficult cycle of unmanageable finances. We should find ways on reducing debt the cheapest way possible and enjoy financial freedom. Thanks for the article!
You are more than welcome. Thanks for the feedback!
Thanks for sharing this tips with us. Sadly I failed with several of the point you are stating but not too late to take your advice for those I'm on time to
Thanks USDCL. You are right: we have all made financial mistakes (including myself). However, as we learn more, we can shorten our discovery to financial pitfalls.Thanks for sharing your thoughts.