Getting credit can be very beneficial. It can help you finance all the bare essentials you need when you move, or bail you out of an emergency. However, not all credit was created equally. Bad debt is essentially using borrowed money in an irresponsible way. In the following article you will see that debts can spiral out of control and leave you in a desperate situation.
1) Not having a plan to get out of debt
In the peak of World War 2 Winston Churchill said “Who fails to plan is planning to fail”. Realistically a plan to get out of debt will be drastically easier than a plan to take down Nazi Germany. Its really is simple – look at your income and expenses and make sure you have enough at the end of the week to help pay down the loan. If you can calculate how much you will have at the end of each week you can also calculate how long it will take you to pay off your debt.
2) Forgetting the First Deadly Sin of debt
Unfortunately many people neglect this rule and commit the First Deadly Sin; they fail to make a plan to get out of debt. The results is debt spiralling out of control, followed by a sudden realization that they will be stuck in debt for many years to come. If you have a plan and stick to it then you should be fine.
3) Taking out more debt than you need
It could be nice to have a flash new car that costs $30,000, but if you’re buying it purely on finance it might be a good idea to ask yourself how much you need it. After all, a car that costs $5,000 will probably do the same thing, maybe just a little slower and without leather seats! Ask yourself why you have the debt and be realistic. If you took out the credit card to buy groceries then it’s unlikely you will need a $10,000 credit limit; even $300 might be excessive for that purpose. Having too much approved credit can be a temptation and a risk for even the most experienced credit veteran.
4) Supplementing your income with debt
Living beyond your means is the easiest way to build up debt and create problems. If you earn $700 per week and spend just an extra $100 on a credit card each week for a year, the balance of the card would be $5,826.68 (at 21% interest). In the second year, to pay this off you would effectively need to live off $125.20 less or just $575 per week. Imagine how hard this would be once you’re accustomed to living off $800 per week. Moreover, the total interest paid would exceed $1,000!
5) Failing to shop around
I have a friend who went to a car yard and purchased a new car on finance. Unfortunately for him the finance they provided was at a rate more than double what he could have got elsewhere, and the termination fees were so high it wouldn’t be worth paying off early. Always read any loan documents carefully, as once your name is on the dotted line, there is no backing out.
6) Paying more than you need to
It’s simple, why pay more than you need to? Shop around and make sure you are getting a good deal on any credit you apply for. Many loans have no termination fees or application fees. Interest rates on many credit products can be much less than others.
7) Forgetting to follow rules 1 and 2
Just to reiterate how important it is – never forget to make a plan to get out of debt once you’re in debt. If you neglect to take action to get out of debt, it can put you in a depressing downward spiral that only ends in pain.