Don’t you wish you could just wake up one day to find that all your existing debts have been settled? If only paying off debts could be that easy! Settling debt is not an overnight job and by no means an easy one. Many borrowers struggle to pay off debts with a limited source of income that’s barely enough to make ends meet. And then there are some borrowers who fall into a vicious cycle of debt by making very silly, yet common mistakes such as taking out another expensive loan to settle an existing one or borrowing from illegal moneylenders.
Do you currently owe money to a bank, credit card company or a relative/friend? Here are 7 common mistakes you must avoid while paying off your debt.
Not prioritizing your debt repayment plan
The tricky part about settling debt is the interest rate. Ignoring high-interest debts to maintain healthy liquidity is never a good decision as the double-digit interest rates will hurt you in the long run. Unsecured personal loans or credit card debt can snowball into a financial crisis if not prioritized and paid off duly. Always remember the golden rule – High interest means high priority.
Maintaining the same old spending habits
Poor spending habits are one of the most common reasons why people get stuck with debt, and the worst part is that most do not learn their lessons. Chalking out a budget and managing your spending is a good start. Using innovative methods such as using the Zero-sum budget or the 50/20/30 budgeting strategy to keep a check on spending is even better. In short, never fall back into bad habits that got you in trouble.
Blindly following a one-size-fits-all repayment strategy
A debt repayment strategy depends strictly on the kind of debt you owe, your present financial circumstances as well as your sources of income. While it might be tempting to follow a friend’s advice that may have worked for him, it is prudent to devise your own repayment plan based on your situation. For sticky debt situations that are difficult to remedy on your own, you could even seek guidance from a financial expert or debt counsellor.
Not keeping emergency funds on the side
One common mistake that most people make in a rush to settle their debts is not maintaining the funds for an emergency. While paying off debts is necessary, one must also be financially prepared to tackle the unexpected contingencies of life. Without an adequate emergency fund, you will find yourself borrowing more money and falling deeper in the rabbit hole. Even if it’s a few dirhams a month, always make sure that you maintain a rainy day fund.
Trying to tackle multiple debts all at once
Mortgage, medical bills, student loans… you may be burdened with one debt too many but it is wiser to take care of every individual debt based on where it features on your list of priorities. Rank your debts based on interest rates, the outstanding balance you owe, settlement period, etc and devise a plan to repay these debts accordingly. It is important to deal with your debts systematically, instead of rushing to tackle them all with limited funds at your disposal.
Ignoring your credit report
Keeping an eye on your credit report is an excellent way to assess your financial situation and even stay on top of it. The credit report carries your financial information such as debts, repayment history, existing credit accounts. Moreover, you are given a credit score based on your financial history which helps banks determine whether or not you’re a responsible borrower.
Not chalking out a budget
Just because you are able to manage your finances for now does not mean you don’t require a budget. In fact, you will be surprised to know how many leaks and holes you will end up plugging once you draw out a proper household budget. Giving a form to your amorphous financial life will help you stick to a plan and stay in control of your expenses.
[Related: 3 Lies You’re Telling Yourself About Debt]