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4 Things Not to Do When You’re Drowning in Debt

When you’re struggling to pay off debt, it’s easy to make financial mistakes that make money matters worse. The reality is, in order to create – and stick with – a strategic debt payoff plan, you’ll need to know which common money pitfalls to avoid. After all, you don’t want to accumulate more debt or take years to tackle paying off debt.

So, if you’re trying to pay off debt, dodge common money missteps and make savvy financial decisions to reach your long-term goals.

Don’t delay paying off debt. “The worst thing that I see people do is throw their hands up in the air and think, ‘Well, I’m already in debt. What’s a little bit more?’ and they go out and spend money on dinner or buy something that temporarily makes them feel better,” says Mitchell Hockenbury, a certified financial planner with 1440 Financial Partners in Kansas City, Missouri.

Instead, Hockenbury urges setting aside a couple of hours with no distractions and trying to come up with a well-thought-out plan for getting out of your debt. And, it may seem like a no-brainer, but it’s critical to pay your credit card balance in full every month and never skip credit card payments to keep your debt repayment plan on track.

It may help to think about how your current debt will affect you down the road, suggests Stuart Ritter, a senior financial planner at T. Rowe Price based in Baltimore.

“Don’t think of it as money you owe someone else. Debt is having spent your own future income. In other words, your future self will be devoting income to your past spending,” Ritter says. The best way to get your past spending under control is to lower your current spending, he adds. If you don’t cut back on your day-to-day spending, it’s going to be hard to find extra money to throw at your past financial obligations.

Don’t tackle paying off debt without working toward future financial goals. While you don’t want to ignore paying off what you owe, you could also be making a mistake by obsessing over it.

“Don’t assume the best thing to do is put all your extra money toward your debt,” says Eric Roberge, a certified financial planner and the founder of the Boston-based financial planning firm Beyond Your Hammock. “In some cases, yes, paying off your debt as quickly as you can by making more than the minimum payment or making extra payments [is best], but it depends on your goals, your cash flow and the interest rates on your loans.”

Think of it this way: If you’re always putting all of your extra money toward paying off your credit card debt, but you aren’t putting any money aside for an emergency, you could leave yourself vulnerable if something happens, like your car needs a new fuel pump. In that scenario, you could end up buying the fuel pump with your credit card, and with the interest you would pay you could dig yourself deeper into debt.

In other words, be aggressive about paying off your debt, but also realistic, and take into account that you’ll want an emergency fund to fall back on for other major unexpected expenses, too.

Do not cash an unsolicited check from a lending company. Lending companies often send checks out to consumers for amounts such as $800, $1,200 and more. All you have to do is go to a bank or financial institution and cash it. But there’s a catch: The fine print will often show that the interest rate is high, sometimes as much as 36 percent. So, any short-term debt relief will be followed by possibly being saddled with debt for years.

It’s also a wise idea to steer clear of payday lending companies – and avoid taking out more high-interest debt when you’re already deep in debt. Doing so will cause you to go into even more debt with the average interest rate for a typical average two-week payday loan at 400 percent APR, according to PayDayLoanInfo.org, a website run by the nonprofit advocacy group Consumer Federation of America.

Be wary about consolidating credit cards with zero-interest offers. Many personal finance experts suggest transferring your revolving credit card balance from one credit card to one that has a zero-interest APR for, say, 12 to 18 months. It sounds like a good idea in theory, and it could be in practice. For that period of time when there’s zero interest, if you pay off your debt, you will save some money in interest. But if you aren’t careful, these strategies can make your debt continue to climb.

“There are several traps to this,” says Corey VanDenBerg, a mortgage banker with Platinum Home Mortgage in Lafayette, Indiana. “First of all, there is likely a balance transfer fee, so you have added to your debt.”

If there is a balance transfer fee, it’s probably around 3 to 5 percent, and so if you’re transferring $6,000 from one credit card to another with zero-percent interest, you may end up immediately spending $180 (and that’s if it’s a 3 percent fee).

“Second, if you miscalculate or the new credit card doesn’t give you enough credit, then you wind up with another bill and a leftover debt on the old credit card. This can actually add to your monthly payments instead of subtracting,” VanDenBerg says.

And, of course, there is always the chance that you transfer that $6,000 to the credit card with zero-percent interest and you don’t get it paid off in that allotted period of time. In a worst-case scenario, if you end up using your old credit card and maxing it out, you could eventually wind up with double the amount of debt that you had.

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