The Price of Bad Debt Management
Stress, sleepless nights, an inferior credit score, high interest rates, looming bankruptcy, and low self esteem are some of the reasons why it is not such a fun idea to be tangled up in debt. Ordinary consumers actually do not plan to get deeper into debt, but it is this lack of plan that lead them into the debt pit. They work for a living, spend and enjoy life and not mind the repercussions of unrestrained and irresponsible use of money and credit. This is bad debt management. Below are some tips that you must NEVER follow if you are in the right frame of mind.
9 Bad Debt Management Ideas You Should Not Practice
1. Sign up for credit without fully understanding the interest payment schemes. Having a credit card or two is not a bad idea. Credit cards are very useful during emergencies, convenient for online purchases, and secure when you need to purchase a big-ticket item since you do not have to bring a thick wad of cash to the store. However, signing up for a credit card without completely understanding the interest payment schemes is like jumping into the water without checking if it is infested with crocodiles, or if it is scalding. Credit card companies are business entities, it goes without saying, they come up with marketing schemes that make their products enticing to consumers. This includes spotlighting “low interest rates” or zero-interest”. You must be smart enough to figure out that zero-interest rates for three months means that you must pay the total credit amount within the specified three months. If the amount has not yet been fully paid by the fourth month, expect that interest will start to accumulate on your balance and you may be charged with late penalties. Low interest rates are often used to bait new borrowers and is offered for a limited period. So make sure that when you use it, you can pay the balance in full before the higher regular rates kick in.
2. Make late payments for your credit card accounts. Although it is said that it’s “better late than never,” still this is a bad debt management practice as it ruins your credit record and cost you late penalty and other charges. Always pay on time to keep your credit score in tiptop condition and avoid hefty penalties and interests.
3. Pay only the monthly minimum dues. Many credit card users fall into this deceiving trap. This is the best way to get yourself enmeshed in debt. You contentedly enjoy your purchases without really feeling its impact on your wallet, actually, not just yet. Your credit score remains intact and your creditors leave you in peace. Meanwhile, your debt is spiraling as interest continues to compound… To avoid this, make it a point to pay on time and in full each month. Before making a purchase, make sure that you have the means to pay the amount in full when due date arrives. Do not buy items that you can consume fast, like vacations and dinners, using your credit card if you do not have the means to fully settle the amount in one or two months.
4. Do not follow a budget or do not care if you spend more than what you earn. The basics of good debt and money management includes spending within your means. Spending beyond puts your finances in deficit. Credit cards are the best vehicle for consumers to spend more than they can afford since they are easy to obtain. However, since you spend more than what you earn, you end up entangled with debt that continuously grows like a little monster that gets larger by the day. And one day, you find yourself at a loss on how to get rid of it. Some people even irresponsibly max out on their credit limit even if they do not have the means to repay it. They end up paying for greater interest and many companies also charge for spending over your credit limit.
5. Have multiple credit cards which are more than you can handle and settle. A credit card or two is sufficient enough to accommodate credit card purchases of an ordinary consumer. Having multiple cards will only confuse you especially if you are not keen on managing your finances, and also leaves you vulnerable to more easy credit with just a swipe of the plastic.
6. Do not miss buying items on sale or offered at zero percent interest even if you do not really need them. Just because a fetching pair of shoes is on sale does not mean that you have to buy it. You have to ask yourself two questions before buying something with your credit card: (1) “Do I really need it?”; (2) “Can I afford it?” If your answer is “No” especially to the second question, run away from the shop before the compulsion gets the better of you.
7. Hide from your creditors when they collect payments. Calls from collection agencies and demand letters are often vexing and stressful. It is alright to give annoying credit collectors the slip, however, instead of running away from your creditors when your debt escalates into serious proportions, it would be more helpful if you have to face them, honestly explain your financial difficulty, and negotiate a lower interest rate or a more affordable payment schedule. You can actually do that without hiring a debt management company.
8. Signing up for a debt management solution without reforming bad spending habits. Whether or not debt management programs, debt consolidation, or other forms of managing debt are effective, they are still useless and you could even end up deeper in debt if you do not change your wrong spending habits, which could be the main culprit for your predicament.
9. Do not periodically check your credit score. It is possible for erroneous entries to find their way into your credit record, so take time to check it at least once a year. Identity theft is rife so make sure that the report reflected on your record is yours and not of someone else’s. Before obtaining a loan, make it a point to check out your report first so that you will know what your prospective creditor would see. A good credit score also allows you to enjoy lower interest rates and possibly help you land a good job, so do not take it for granted even if you have not incurred significant debt.