7 Debt Repayment Mistakes That Are Keeping You In the Red
Does it feel like no matter how hard you work at eliminating your debts, you just can’t seem to get the upper hand? Common debt repayment mistakes can keep you from getting out of debt.
Carrying debt is a common narrative for Canadians across the country. A report by credit monitoring agency Equifax warned that total debt per consumer sat at a whopping $72,950 as of the end of 2019. This includes mortgage debt, which was about $49,150, and non-mortgage consumer debt, which was another $23,800.
Consumer debt includes everything from credit cards and lines of credit to personal and student loans. The typical Canadian consumer who asks the Credit Counselling Society for help with their debts owes about $32,000.
So despite your best efforts, why are you stuck in a vicious cycle when it comes to your debts? Here’s a look at 7 common debt repayment mistakes that are stopping you from becoming debt-free.
1. You’re Still Spending on Credit
While you may be diligently funnelling part of your monthly income towards paying off your debts, if you’re still swiping, tapping, and spending with your credit cards or your line of credit, then you’re still feeding your mountain of debt.
It’s hard to break free of living with credit to start living within your means. But until you do, you’re simply paying down debts and adding back to them each month.
Spending with invisible money comes with a string of issues too – research has suggested that consumers shopping with credit cards spend 12-18% more than when they use cash. And if you don’t pay off your balance in full each month, you’ll end up spending as much as 50% more on everything you buy after interest, fees, and penalties are factored in.
2. You’re Only Making the Minimum Payment
If anything should scare you away from adding to your credit card debt, it’s the excessive interest you’re paying on your purchases. Each time you make the minimum payment on your debts, your outstanding balance is charged interest rates as high as 30% or worse. At the end of the day, your minimum payments may just cover the interest you’re incurring and won’t apply to your principle debt at all. Until you increase your payments, you could be stuck in debt for years.
Open your statements and study them closely. They will outline how much you’ve paid in interest so far this year alone and how much you’ll pay in interest if you stick to making the monthly minimum payments. If you’re making a minimum payment of $60 on a $3,000 balance with 19.9% interest (APR), it would take you 53 years to pay it off and you’ll have paid an extra $12,709 in interest.
3. You’re Missing Payments and Facing Stiff Penalties
Missing payment due dates will lead to many setbacks, from hurting your credit rating and tarnishing your credit history, to facing stiff penalties and further charges on your debts. Missing even one full billing cycle with your credit card could increase the interest rate by 5%. And it takes a full year of on-time payments to get that 5% penalty removed.
Falling behind further, late fees and penalties make your debts even more expensive. If you’re months into delinquency, you could even end up in collections and the interest rate could go up again.
Stay on top of making your payments each month, whether it’s by setting reminders on your smartphone or automating payments before their due dates. And if you need help, asking for it sooner than later gives your creditors more options to help you. Contact us and we’d be happy to give more details.
4. You Aren’t Tackling High Interest Accounts
There’s a reason why Credit Counsellors insist on consumers choosing a debt repayment strategy – and why the avalanche method is so popular. We’ve warned about the dangers of high-interest accounts keeping you in debt, and if you aren’t paying off these accounts strategically, the interest will keep you drowning in debt.
With the avalanche method – also known as debt stacking – you’re targeting the debts with the highest interest rates first. As you pay down your debts that rack up the most interest, you’re freeing yourself from excessive interest rates so you can funnel more of your payments towards the principle. Prioritizing your high-interest accounts can help you get out of debt fast.
5. You’re Repeating Old Habits
Some consumers take action by consolidating their debts and streamlining what they owe onto a balance transfer credit card, line of credit, or personal loan.
When you consolidate your debts, you effectively free up thousands of dollars on your credit accounts. This can be really risky if you’re a spender as there’s a chance you could turn to your cards all over again. Many consumers repeat the same mistakes that got them into the red in the first place and re-accumulate debts onto their accounts, especially if they don’t have a budget in place that will help them live within their means.
If you’re choosing to consolidate your debts, you need to refrain from creating a new mountain of debt onto the accounts you’ve just wiped clean. Debt consolidation is a good time to clean up your finances and reflect. Acknowledge how you got into this position, what it’ll take to get you out of it, and how to ensure it won’t happen again.
6. You Don’t Have an Emergency Fund
When it comes to spending and saving, sometimes it can feel like you’re taking one step forward and two steps back. You’ll make your debt payments diligently and avoid adding to your debt load, but a financial emergency will come up and you’re suddenly back to where you started. Try to avoid adding to your debts when a crisis strikes by creating an emergency savings fund. This way, when you’re facing challenges such as a job loss, home repair, or medical emergency, you’ll have a savings cushion to get you through at least part of the expense instead of undoing all the progress you’ve made in paying off your debts.
7. You’re Doing It Alone
Even with the best intentions, many consumers don’t know how to start tackling their debts or how to put their debt repayment plans into action long-term. It takes dedication to budgeting, tracking your expenses, and ensuring you’re staying on top of due dates to reach the checkpoints and milestones you’ve set (and you need to set them!).
If you’re having difficulty with setting up the building blocks to get yourself out of debt, whether it’s building a balanced budget or sorting through your debts, seek help. Recruit your partner, sibling, or personal finance-savvy friend. Also consider whether you might need professional help. Taking on the major undertaking of getting out of debt on your own is a daunting task and if you’re unsure of how to make realistic changes to your spending and your lifestyle, you’ll only freeze or worsen your situation.
Professional Credit Counselling Help is Available from CCS
Sometimes, getting professional help from an expert is your best course of action. We’re an award-winning, non-profit credit and debt counselling service. You aren’t alone in tackling your debts – we’ve helped hundreds of thousands of Canadians with their money and debt problems. Reach out to us by toll-free phone, email, or anonymous online chat. We’ll answer your questions and give you the guidance you need. If you want to know more about getting out of debt, contact us now for a free, confidential appointment. We’re here to help you in any way we can.