Avoid 10 Common Debt Reduction Mistakes

If you want to get out of debt (and stay out of debt) pay close attention to the following:

1. Try not to tackle every debt at one time. Focus on a specific debt or debt category, and put all of your energy and extra income towards paying off that particular debt. (Of course, always pay your minimums!) Don’t be a spotlight, be a laser. By focusing on one debt, you will reap the psychological rewards of seeing substantial progress.

2. Do not cancel your credit card if it still has a balance. While I do not use credit cards, I waited until after I was finished paying my balances in full before I canceled my credit card accounts. Why? If you close an account before you pay your balance, you have no leverage with the credit card company. Why should they work with you if you are no longer a customer. Wait until the balance has been paid and then cancel the cards.

3. Do not build your debt reduction plan around unrealistic expectations. If you have never been on a budget, don’t expect to have a “perfect” month right off the bat. Realize that it takes time to change behaviors, attitudes, and habits. Create a realistic plan.

4. Try not to skimp on the emergency fund. I’m a big fan of having a “baby emergency fund” of at least $1000 in my savings account at all times. If you are going to get out of debt, you will be VERY tempted to empty out your cash savings and put every single available penny towards debt reduction. Resist this very powerful (and very real) temptation. Why? Just as soon as you empty that emergency fund for debt reduction, an unexpected expense will arise, and you’ll have to borrow money to pay for it. Instead, use your emergency fund for true emergencies, build it back up, and then continue with your debt reduction. It’s better to miss your goal date by a few months (like I did) than to live life without some emergency cash.

5. Do not listen to a thousand different voices saying a thousand different things about YOUR plan. This one may sound strange coming from a guy who writes about personal finance, but be careful about to whom you listen. The only person who can truly understand you is YOU. I used Dave Ramsey’s Snowball Method, and paid my debts smallest balance to largest balance. Others use a method whereby you pay your debts highest interest to lowest interest. Still others use a combination of the two. Whichever plan you adopt, or if you come up with your own plan, be faithful to yourself. Do what you know you will do! (This is NOT to say that you shouldn’t listen to SOME advice, but be smart about it. Not every personal finance book fits your particular situation. I had a friend who has 100,000 dollars in credit card debt try to tell ME how to manage my finances. I listened to what he had to say, nodded politely, and then changed the subject!)

6. Never allow your credit card company access to your savings or checking account. While I am sure that all credit card companies are honest and above aboard… ahem… I would never allow them to withdraw funds directly from my bank accounts. Instead, use online bill pay provided by your bank or send in a check to pay your bills.

7. Avoid using a second mortgage to consolidate automobile or credit card debt. Before you use any company to consolidate your debt, read the fine print! Personally, I find that most people who move debt from a credit card to a mortgage, without changing their behavior, end up with mortgage debt AND additional credit card debt. Plus, who wants to risk their home for the sake of paying off unsecured credit card debt?

8. Try not to make major purchases while you are getting out of debt. In some cases, making a major purchase in unavoidable. If the washing machine dies, it has to be replaced. But, one of the worst mistakes that you can make is to pay off one or two credit cards, get a little breathing room, and then go buy that television set, new car, or lawnmower that you’ve been wanting. Wait until you are debt free and THEN reward yourself by buying something nice. (I would almost guarantee, however, that once you get out of debt, the LAST thing you will want to do is go out and spend a lot of money. I spend LESS money now that I am debt free than I ever spent when I was in debt!)


9. Don’t argue with your spouse about money. It’s just not worth it. I’m very blessed to have a wife who has been “on board” throughout this whole process. I will confess, however, that we would have been debt free a month or two sooner had she been as crazy dedicated as I was to the plan. Once we created a budget, I never once criticized her for the purchases she made. There were things that she purchased that I would not have purchased, but I was so thankful for her love and support, I kept my mouth shut.

10. Never think that you are stuck with the life that you have right now. I find it amazing the number of people who don’t think they can do anything about their jobs, their health, their finances, or their futures. If you want a better life, you must choose a better life. Read a book. Write a resume. Find a church. Join a support group. Create a plan. If you are frustrated and feel like there is no hope, wake up! You can have an awesome life. Stop feeling sorry for yourself, stop worrying about your past, stop blaming yourself and others, stop making excuses, get up, get out, get going, and get a life! You can ROCK!

NCN

http://www.ncnblog.com

No Credit Needed is a personal finance blog about debt reduction, saving money, and simple living. Thank you for visiting the site and please consider subscribing to No Credit Needed by Email. Have a blessed day!

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32 thoughts on “Avoid 10 Common Debt Reduction Mistakes
  1. MerleSneed

    NCN,

    Good list of things to consider. I especially like numbers 1 and 10.

    I see lots of people who let the totality of things keep them from trying.

    No one is a bigger example than me about not having to accept the life you are dealt.

    Keep up the good work.

     
  2. tim

    3 and 4 are perhaps the most important. one of the keys to getting out of debt (not many people who talk about budgetting or personal finance point it out) is that you must change your behavior. Changing behavior is critical, because it will guide you post-debt when you have lots of money around. The temptation will be there to spend frivolously, to spend on credit, etc once you are out of debt (it happened to me the first time I got out of debt, because I just went to my old ways). You’ll get those credit cards again. Remember, credit card companies love people in debt and will continue to love you, because you had a history of debt. They know that chances are, people are prone to habit. So changing behavior is very necessary.

    I hope I’m not self-promoting, but I went to a 12-step program when I was in debt. Why? All the symptoms and effects are there for people who are in debt just as if you were an alcoholic, a gambler, or any other compulsion. Many people are in debt because they compulsively shopped for whatever reason.

    Just like someone in recovery, having structure (i.e. a budget) is fundamental to breaking your spending behavior. At least if you are at the point where you can see that you’ve made mistakes and that you want to do something to get out of it (hey isn’t that the first step?), that is important.

    Getting out of debt takes time and patience. like NCN stated, don’t move too fast even though you have the means(that’s the compulsive inside you), because it will come at a price to something else.

    number 10 is good, too. The fact is, when you are overwhelmed, you simply cannot distinguish between things that you can control and things that you cannot control (ahh, this phrase is in every 12-step program). When we are down, we tend to focus on things that we cannot control. We think about all of them all at once, rather than focusing on things we can control (like a budget) and creating small steps (ahh, one step at a time). Once you break up your debt, it is much easier to tackle. Like NCN stated, break it up how it bests suits you.

     
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  4. Karen

    GREAT list! I think the key is, find out all you can about repaying/getting out/staying out of debt; then make a plan that works for YOU, then just work the plan. Simple! (But not EASY….)

     
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  7. Scott from Debt Relief Companies

    First off – I love the design of this site! More importantly, I like the advice given in #10 however, some people need professional help to boot. Their debt has gotten so far out of hand that they cannot use Dave Ramsey method or any other do it yourself method for that matter.

    They need serios help and someone (or some company) who can keep them disciplined and focused on the goal.

     
  8. Jason Sadler

    Where was this information when I got my hands on my first credit card 10 years ago??

    Everyone makes mistakes though, it’s too bad the financial ones seem to stick with you the longest.

     
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  14. ispf

    […] I personally believe that credit cards are not evil. It is the ignorance on the part of the credit card holder that causes all the debt problems. So, in general, I don’t agree with the stance taken by NCN @ No Credit Needed. But I have to admit this article about 10 Common Debt Reduction Mistakes is very good and I highly recommend it to anyone on the quest for debt reduction. […]

     
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  16. debt monster

    Hey NCN

    I messed up on #8. Instead of paying off the last payment of the CC, we had new tile installed instead. We really really needed new floors but should have waiting until a month or 2. Our debt free date is pushed out a month or so but at least the floors are done.

     
  17. Lateefah

    I think that all of this coming from a man who is not a financial expert is just beautiful, it really makes me thing that I can get it together. Thanks alot dude!

     
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  23. Steve "The Debt Reduction Man" B

    I totally agree especially with point number 7. Many people that I speak with that used a home loan to pay off their unsecured debt, ends up right where they were before except now they have a much higher mortgage and have a high risk of losing their home. By using a home loan you are not reducing your debt but simply converting it from a not so risky unsecured debt into risky secured debt.

     
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  27. Dave Mason

    One thing that I have done well with is a little mantra when I am about to make a purchase. Live by your needs and not your wants. I know it sounds easy but it can be tempting not to follow this. I am debt free today but 10 years ago it was a different story. I enjoy piece of mind more than worrying about how I am going to pay for something.

    Debt Free Dave
    http://getprequalified.com

     
  28. Bill

    Debt reduction is huge business these days. Be leary of someone who promises you the world without telling you the pitfalls. A good company will be accredited by the Better Business Bureau, will be low-priced, and will explain the advantages and disadvantages.

     
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