6 Dumbest Mistakes in Paying Debts Off

Achieving debt freedom is a critical priority for you as no debt will minimise your exposure during difficult economic times. Additionally, money isn’t free, for every $1 you borrow you pay $3 back depending on the product. That’s great for the banks, but not great for you. 

We all want to be debt free, here are the biggest mistakes people make when paying their debts.

Debt cycle

The question I must ask is how it is that I fell into debt in the first place. A recent poll of our clients aligned with the broader community trends, the most common issue is living beyond our means. Credit cards, from a psychological perspective, are cards that give you ‘free stuff’. The brain says, “No, that’s going to cost you dearly later”, the emotions say “YES! This feels GOOD!” The result of doing ‘what feels good’ is falling into that perpetual debt trap of spending, refinancing, and spending cycle. 

High-interest rates

When considering which card to prioritise for paying off quicker, it’s wise to focus on the high-rate accounts. Additionally, take the card and cut it up to remove the temptation to use it again.

Paying the minimum monthly due only

If you’re financially hand to mouth, the minimum monthly due payments are a good fallback position. However, paying the minimum while you’re in budget surplus is just laziness, and frankly, you may as well feed your cash through the shredder. To make your money work for you, every spare dollar ought to be poured into your debts to pay them off sooner.

Borrowing from the wrong lender

Falling for marketing hype and prioritising convenience can cause major pains for you later. It’s great to have 12 months interest-free for purchase, just make sure that loan is paid off in 12 months otherwise the loan may transition into a high-interest credit card. Same again for the convenient ‘payday’ lenders, the costs could be very high both in money and potentially your credit report.

Talk to us about how we can reduce your debts by 1/2 or more within 3 weeks, 1300 490 030, or enquire here.

No plan. 

If you don’t plan your journey will be more directionless. Commit to a debt-free goal by a certain date, and prepare a plan on how to get there through budgeting and maximising income. As part of your plan, work out how you will pay your credit cards.

There are three popular methods to pay credit card debt off. 

1. The ‘snowball’ method. Prioritise payments to the lowest balance debt first, once it’s paid in full, then use the card payments towards the next highest credit card, and so on. The momentum soon builds and soon enough your debts are dropping off. This also sets off the rewards trigger in our brain, we get a feel-good surge which helps sustain the momentum.
2. The ‘slow but efficient’ method. That is prioritising the credit card with the highest rate, the logic is to eliminate the credit cards that charge the highest interest rate. It doesn’t appear to be as quick as the snowball method but saves you money in the long run. 
3. The ‘negotiation’ method. If your budget is in deficit, or at least you barely scrape through, you may qualify for a negotiated outcome with your banks. A professional negotiator could leverage your profile to reduce your debts by 50% or even waive the debts in full without negatively impacting your credit report.

Missing payments

Never miss a payment, the long-term cost to you is simply too high. Never mind the obvious reasons, such as late fees and higher interest charges. The killer is your credit report. One missed payment will show as an arrears event on your credit file and it reduces your credit score. Too many of those and it could potentially stop mortgage finance for your dream home dead in its tracks.   

There you have it, it’s not rocket science, but the smartest of us can and do make these mistakes. The key is to remain focused on your debt-free goal and stick to your plan, before long you will be free of debt!

About the Author

Credit Mediation Service specialises in reducing or waiving debts for people. As the oldest negotiation house in the country, Credit Mediation Service changes lives by negotiating full debt waivers with banks while maintaining their client’s credit rating integrity. To date, $106 million has been saved for families and businesses around the country. The director, Laurence Hugo, is a TEDx speaker and a professional negotiator with 30 years of banking experience. His background is complemented by 15 years of working with Sydney Lifeline as a counsellor and part of the training team. If debts are stressing you, speak with Credit Mediation Service to start a conversation that may end in you becoming debt free.

This article should not be considered legal or financial advice, but as a general guide only. If you are facing legal recovery action, please consult a legal attorney to assist you.