Tips for Avoiding Debt

Avoiding debt is one of the best ways to prepare for a secure financial future. But living completely debt-free is not often realistic. As we continued to recover from the effects of the COVID-19 pandemic, many struggled financially, and debt grew. Perhaps you fell behind on mortgage payments and risked foreclosure. You may have incurred unexpected medical debt.

Credit cards, mortgage loans, and car payments are necessities in most consumers' lives today. Minimizing debt, avoiding overdue bills, and avoiding aggressive debt collectors who use unfair collection practices are in everyone's best interests.

Credit Cards and the Slippery Slope of Debt

Falling into credit card debt risks your financial freedom. A credit card can function as a high-interest loan rather than a cash substitute. As debt builds, it becomes increasingly difficult to get out of debt. Low monthly payments—usually only 2-3% of the balance—and high interest rates keep consumers in debt for many years. If you can't pay, you could end up in debt collection, destroying your credit score.

But when used properly, using a credit card may offer several advantages, such as:

  • Protecting purchases
  • Having fraud protection
  • Building your credit score
  • Earning rewards and cash back
  • Making it easier to purchase expensive items without carrying cash

Knowing how to use a credit card is an important part of avoiding debt and debt relief. Here are tips on inappropriate and appropriate credit card use.

Common Credit Card Mistakes

  • Making charges that you can't afford. Many of us make the mistake of charging items, such as luxury goods, that we can't pay for with cash. If you can't pay for the item with cash or make repayments at the end of the month, you may be overspending and living beyond your means.
  • Using credit cards for food purchases. Paying cash for groceries or eating out can eliminate charges for items that no longer exist when the bill arrives. Paying interest on disposable items will negatively impact your financial situation.
  • Taking costly cash advances. They result in a higher interest rate on the advance amount. The transaction fees also usually offer no grace period. Without a grace period, the accumulation of interest begins the day you take the advance. Even if the balance gets paid in full at the end of the month, you still pay interest on the borrowed cash.
  • Enrolling in special services. Many credit card companies offer extra credit card fraud protection and life insurance. These services are typically unnecessary and overpriced.

Focus on Smarter Credit Card Use

  • Create a budget. Assess your necessary monthly payments, like utility bills, mortgage or rent, and child support. Develop a reasonable budget you can stick with. Rather than relying on credit limits established by the credit card company, take an active role in avoiding debt by budgeting the amount of money you have in the bank.
  • Pay your credit card debt down. If you have credit card debt, make a plan for paying it off. Focus on one at a time. Choose your lowest balance first, as it will be easier to get those cleared. Or focus on a card with the highest interest rate. To combine this debt, you can also shop for a new credit card with a lower introductory interest rate on balance transfers or a personal loan that will give you a set monthly payment to manage.
  • Use credit cards for emergencies only. Sometimes, avoiding debt in emergencies is impossible. Unexpected car repairs, medical bills, and household needs can impact anyone's carefully planned budget. If paying for an item or service with cash isn't feasible, purchase with a credit card. To stay out of debt, make a repayment plan in your budget.
  • Pay the balance in full each month. Only make charges when you can pay off the entire credit card balance when it is due. This will avoid interest charges and save you money.
  • Make payments on time. Making payments on time is a great way to build your credit. Arrange automatic payments where you can. When you don't pay the minimum payment on time, the credit card company can charge late fees and raise the interest rate to the default rate specified in the credit card agreement terms. Default rates are sometimes double the standard rate. Late payments drastically impact your credit score.
  • Limit the number of credit cards. Too many credit cards make recording transactions and making timely payments more challenging. Most consumers need no more than two credit cards.
  • Read the fine print. Credit card agreements contain essential terms about interest rates, late fees, and default rates. Credit card companies make money off consumers who fail to pay on time. Education about the terms can help consumers avoid paying fees and high interest rates.
  • Keep a record of purchases. Pay attention to credit card bills to guard against errors and fraud. Comparing receipts with the statement will ensure you don't pay for unauthorized or mistaken charges. Contact the credit card company immediately to receive protection from liability when fraud occurs.
  • Leave your credit cards at home. One of the best ways to stay out of debt is to leave your credit cards at home. Avoiding debt is easy when the only purchases made are with cash.
  • Check your credit report regularly. Keep tabs on your credit score and look for mistakes in your report. If you find any errors, dispute them with the credit service.

Why Should You Avoid Unnecessary Debt?

A poor credit score can cost you money in unexpected ways. While some debts, like student loans, are necessary, unnecessary debts can hurt your personal finances and credit score. Debt has a price, which is interest. You'll pay more than the original amount for your debt with a higher interest rate.

While you may get a car loan, you'll pay substantially more if your credit is less than healthy. A poor credit score can increase car insurance rates and may even exclude you from specific jobs. This debt may also take you longer to pay, which will, in turn, increase your debt load. Before you know it, you will get stuck in a debt trap.

Unnecessary debt can also prevent you from getting a mortgage and owning property, as it will appear on your credit report. Financial institutions always look at your credit history and see your car loans, credit cards, student loan debts, and other loans before they approve your home loan request. Your bank will likely deny your mortgage application if your debts are too high.

Tips for Eliminating or Reducing Debt

Getting out of debt can feel overwhelming and impossible. Debt management and effective budgeting are skills anyone can learn. These tips may help if you are struggling or are looking for a starting point to reduce debt:

  • See if you can negotiate with your lender for a lower interest rate.
  • Talk to your credit card company and other creditors about Coronavirus/pandemic relief programs.
  • Try nonprofit credit counseling.
  • Discuss debt settlement with your credit card companies. This will cancel your credit card, but it offers a lower total payment and interest rates.
  • Try paying more than the minimum on your loan payments.
  • Keep track of your spending. See if there are areas where you can cut back.
  • Try debt consolidation. See if your bank will let you consolidate all your debts into one personal loan at a lower interest rate.
  • Consider refinancing your mortgage. But do your research before you do so, as it may be more expensive if you don't have much equity.

Beware of Credit Repair and Debt Relief Scams

Watch out for credit repair or credit counseling scams. Many companies appeal to consumers with poor credit histories by promising to clean up their credit reports for a fee. After paying hundreds of dollars in up-front fees, these companies may do nothing to improve your credit reports. Worse yet, many vanish with the unsuspecting consumers' money.

The following tips can help you avoid credit scams:

  • Beware of promises that sound too good to be true.
  • Deal with a reputable agency. Check the agency with state consumer agencies and the local Better Business Bureau.
  • As a general rule, nonprofit credit counseling organizations are the best choices. Verify that the organization provides counseling, education, debt consolidation, and payment services.
  • Carefully read through any written agreement offered by a credit counseling organization.
  • Avoid paying up-front fees. Beware of any high fees or required contributions, like high monthly service charges, that may add to the overall debt load and defeat efforts to pay off bills.
  • Confirm payments with creditors.

Could Filing Bankruptcy Be for You?

If your debt is overwhelming and you can't pay it, you might need more comprehensive debt relief. After your bankruptcy filing, the court will issue an automatic stay that stops debt collectors from contacting you. It also pauses foreclosure proceedings, repossession actions, and wage garnishment.

Filing for bankruptcy is serious and should be a last resort. But a bankruptcy discharge can offer you a fresh start by relieving you from crippling debt.

Bankruptcy does not discharge all your debts. You will generally still owe on student loans, alimony, child support payments, federal tax debt, and judgments against you.

Two typical types of bankruptcy are available for individuals: Chapter 7 and Chapter 13 bankruptcy. Filing Chapter 7 bankruptcy will discharge your debts. But it's more challenging to qualify for as you are subject to a means test before your bankruptcy case is approved.

Chapter 13 bankruptcy establishes a repayment plan over three to five years. If you successfully comply with this plan, the bankruptcy court will discharge the remainder of your unsecured debt.

Considering Bankruptcy? Talk to a Bankruptcy Lawyer

Bankruptcy is a big decision and might or might not be the best option for your situation. You are not alone. Talk to a bankruptcy attorney if you're unsure where to turn for debt-related legal issues. An experienced bankruptcy attorney understands bankruptcy law and can help you understand your options.

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