How to Keep Yourself Out of Debt
Using credit wisely is one of the keys to achieving long-term financial success. As anyone who has experienced significant debt knows, it’s much easier to fall into that hole than to dig one’s way out. By avoiding these five credit mistakes, you can maintain a healthier relationship with debt.
Mistake #1 – Carrying a balance
The best way to remain on top of your debt is by paying off your credit card each month. Carrying a balance from month to month hurts your credit score and costs you money in interest. Plus, it’s easy for debt to get out of control as purchases add up. The best approach is to treat your credit card as any other bill that must be paid in full on a monthly basis.
Mistake #2 – Missing a payment
According to FICO data, each payment that’s 30 days late can reduce your credit score by 17 to 83 points. Each payment more than 90 days late can reduce your credit score by 27 to 133 points. That’s a huge swing that can have a major impact on your long-term financial health!
Even if your payment is less than 30 days late, you may be subject to penalty interest rates and/or late fees. The best approach is to make all debt payments on time and in full.
Mistake #3 – Closing a credit card
Some people mistakenly believe that closing credit cards will improve their credit scores, but that’s not often the case. A major factor in your credit score is how long you’ve maintained various accounts. For example, if you’ve maintained one credit card for seven years and another for three years, your average credit history is five years. However, if you close the seven-year card, your average credit duration drops to just three years.
Mistake #4 – Trying to pay down too many debts at once
A common mistake made by people in debt is trying to tackle it all at once. This approach can be both overwhelming and demoralizing. A better approach may be to focus on paying down one debt until it’s gone, then shifting to the next debt. Two effective strategies include:
- The snowball method – This involves paying off your smallest debt balance as quickly as possible, then moving on to the next-smallest debt. The benefit of this approach is it can help you gain a sense of accomplishment as you knock out one loan after another.
- The avalanche method – Using this method, you begin paying on whatever loan has the highest interest rate. Once that’s paid off, you move on to the loan with the next-highest interest rate until all loans are paid off. This approach allows you to pick up speed as you go, because each payment saves you more money than the one before.
Mistake #5 – Not reviewing your monthly statements
When debt begins stacking up, some people choose to take a head-in-the-sand approach to their monthly statements. Although it can be stressful to see that balance add up, it’s important to remain aware of your credit card activity. Be sure to carefully review each monthly statement to understand how much you’ve spent, how much you’ve paid and what fees have been assessed. This monthly review is also a great way to quickly identify any fraudulent purchases that may have occurred.
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