From a personal finance standpoint, there’s no better goal than being free from debt. Considering today’s high instances of personal bankruptcy and epidemic levels of crippling debt, becoming debt-free is often easier said than done.
Here’s a look at some of the pitfalls many people fall into while trying to wrangle their debt, potentially causing more debt.
1.Refinancing Your Home Mortgage
Lower interest rates tempt many homeowners to refinance their mortgages. Sometimes, the appeal of lower monthly payments can overshadow sensible financial planning. In many instances, a mortgage refinance is a financial trap that can cause a serious setback in achieving financial freedom.
While it’s true that your monthly mortgage payment will probably be reduced, the amount of time you’ve added to your payoff can cause you to be further in debt than you originally were before the refinance.
Make certain your banker or mortgage consultant runs all the numbers for you, showing you how much money you will save in every scenario. If refinancing your existing mortgage will add to your debt, then you will be working against your own best interests.
2.Expensive Credit Cards
High-interest credit cards can be financially damaging, particularly if you only pay the monthly minimum. They’re designed to ensure that you barely tackle the principle amount, ensuring you’ll be paying for a very long time; many years in most cases.
Consolidating your credit card debt to a single, low-interest or no-interest credit card can be a savvy financial move, particularly if there are no fees associated with the transfers. However, some high-balance, no-interest credit cards can have annual fees associated with them and can be quite expensive. In fact, the fees can more than offset any savings you might realize through the reduced interest rates.
Be certain to read all of the details of any credit card you might consider for a balance transfer. Call their customer service hotline and ask. Until you find a card that satisfies all of your requirements, you’re probably better off not making any consolidation transfers. Unfortunately it is also common for these cards to allow you to do a balance transfer for free and then raise your rates after a certain introduction period of time. In many cases the interest that would have added naturally adds all at once and is added to the principle of the loan.
3.Avoid Fees and Other Penalties
If you carry credit card debt, making your monthly payments on-time is one of the best ways to manage your debt. Timely payments ensures avoiding costly increases in the interest and other fees often associated with late payments.
Cash advances from your credit card are another financial trap, and while they’re unavoidable at times, they’re another source of costly monthly fees and frequently come with higher interest rates than traditional charges.
Carrying no credit card debt is, of course, the best financial situation for you and your family. However, when smartly used it can be the same as cash, and avoiding all the traps and pitfalls that come with late payments and cash advances should be avoided at all cost.
4.Using Credit Cards like Cash
One of the best courses of action a person can take when stepping onto the path of becoming debt-free is to do away with their credit cards. They’re the primary source of consumer debt, and in large part because large amounts of money can be charged but repaid through much smaller monthly installments.
Most cards offer no interest accrual on the outstanding balance so long as the balance is paid in full at the end of the billing cycle. Many people convince themselves they’ll only use their credit cards for small, necessary purchases and they’ll pay off their card or cards in full at the end of each month.
The trap, of course, comes when unexpected demands on your finances occur. If your monthly budget has little margin for error, the first unexpected bump in the road generally results in altering plans to pay off those credit cards in full each month. Before you know what’s happening, you can have your credit cards maxed out again and be right back in debt, perhaps at even higher levels.
If you’re serious about becoming debt-free, dispose of your credit cards and pay them off quickly. They’re an easy and attractive financial trap for many consumers.
5.No Changes in Spending Habits
Without a windfall of money, it’s nearly impossible to become debt-free without curbing spending. It’s not enough to say you’ll just maintain current spending limits but will somehow put more money towards your revolving debt.
Believe it or not, it’s very easy to spend less each month. If you take the time to identify where every dollar goes each month, you’ll quickly discover a lot of frivolous expenditures. Do you buy a lot of DVD movies each month? Renting or streaming is considerably cheaper. How often do you eat a meal in a restaurant? Making meals at home will save you money each month.
The bottom line is to change your spending habits. If you spend less, you will save more, which will result in having more disposable income, which in turn means you can apply more money to principle amounts on credit cards and home mortgages.
Like dieting and losing weight, becoming debt-free, in most cases, will not happen overnight. Be patient, set goals, and stay persistent. If you avoid the traps mentioned above and stay focused on truly reducing your debt, you’ll reach your overall goal sooner than you thought, and with considerably less pain than you ever imagined.
Author:Tim and the crew at CableTV.com take financial responsibility very seriously. We are proactive in helping people get debt free by saving them money on things they are already buying. If you would like some tips or suggestions on saving more money message us on Twitter. @Cabletvcom
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