Debt – the typical mistakes people make

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Debt – the typical mistakes people make

By: James Belle

Society in general has come to accept debt as part of life, something that cannot be avoided. It is not hard to find people with debts that amount to more than 5years of their salary, this without counting their mortgage, and yet many would consider this a comfortable level of debt to live with.

The biggest catalyst is that people are often led to believe that they can sustain more debt, so long as the creditor does not want the money back in the short term, the borrower feels comfortable and this is typical of how credit cards work.

Mistake1 – making the minimum payment
Credit cards are designed to give consumers comfort about their debt levels; the creditor only requires that the customer pays back a small percentage fraction of what they owe every month, in the UK that typically amounts to just 3% or less, if your balance is 1000 for example, and you are only required to pay 30 each month, it suddenly doesn’t look that urgent.

The minimum payment ends up costing people much more than they ever anticipate, it is easy to overlook the fact that only a small fraction of that 3% goes towards reducing your outstanding balance, the bigger chunk is interest charges. If you pay just the minimum you might end up paying ten times the amount you actually borrowed.

You have to make sure you pay more than the minimum payment, a logical way to look at it is; every extra pound or dollar you pay on top of the minimum payment is a dollar for which you won’t have to pay interest next month.

Mistake2 – attempting to borrow your way out of debt
You often see adverts for debt consolidation loans, some even promise to give you a payment holiday, which unless you expect to get a huge amount of money in the near future, is just a way to put off your problems.

The trouble with debt consolidation loans is that they are just loans with a different name, unless you can secure the loan onto something e.g. your home or other assets, it is rare that you would pay less interest on the new loan than you were on your old debts.

Debt management companies might be able to work out a solution for you, they do this by negotiating with your creditors and getting them to reduce the interest on the debt. They usually charge for their services, additionally, your credit rating would be adversely affected for years, therefore, you should only consider this option if your debts are beyond manageable.

Mistake3 – Not Learning about credit
Not many people ever care to find out what their credit score is, even fewer ever care to find out what creditors might put into consideration before deciding to offer them a credit card or a loan.

Your credit score is a powerful tool which, if you have a good one, can be used to get low interest rates and if you know how to shop around, you can avoid paying interest charges as well as enjoying the perks that are offered on some credit cards.
Even if you are deep in debt, your credit rating should be central to devising a strategy to get out of debt; if your credit rating is not too bad, there are steps you can take to quickly boost it and move your debt to a new lender at lower interest rates.

For the majority of people, some debts, such as a mortgage loan, cannot be avoided, other debts however, are avoidable if you are cautious with your spending, remember, if you can’t afford to pay for an item in cash, it is just as expensive if you put it on your credit card, over time, it becomes even more expensive thanks to credit card interest payments.

Article Source: http://www.find-investment-advice.com

James B. writes about personal finance, his work includes tips on bad credit cards, how to get a prepaid credit card and many more on finance.

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