10 Financial Mistakes that Will Make You a Slave to Debt
Dealing with debt can be stressful – particularly during a global pandemic. Job security is at an all-time low. With mounting debt and little means to escape the cycle, Canadians are struggling. This is the worst time in recent history to make financial mistakes that could cost Canadians and their families more than anyone can imagine. They may feel as though their options are narrowing by the day.
Despite owing money, you can still gain complete control over your debt – and you can start by simply avoiding these common financial mistakes and pitfalls. Read on to find out how these blunders are actually making your debt situation worse. Plus, find out how you can get out from under your debt, even during these uncertain times. Yes, there is a way to financial freedom and it starts right here.
Understanding Your Credit Score and Debt
Your debt can affect your credit score. Even though you may be making your minimum payments each month, there is still a consequence. Carrying debt with you for months or years will definitely affect your credit rating. Using more than 80% of your total credit limit or frequently asking for credit limit increases can also negatively impact your score – even if you are paying your minimum. Why does that matter?
Your credit rating is important. A poor score can stand in the way of you getting a job, securing an apartment, getting a loan, or qualifying for lower interest rates. Managing debt is the key to maintaining a satisfactory credit score. Too many Canadians think paying the minimum will keep them in good financial standing. In reality, your surmounting debt and low credit score are hurting you. It’s time to make the changes needed to ensure you are on the right track with your finances.
Here are 10 financial mistakes you need to quit today if you want to kick your hefty debt out of the picture for good.
1. Making the Minimum Payments
Paying the minimum on a credit card will keep your debt from decreasing. It is a financial mistake too many Canadians make everyday. If you check your credit card statement, you will see the total length of time it would take you to pay your bill in full if you were to pay only the minimum until it was paid off. You would be astonished to see that just a few thousand dollars could take more than a decade to pay back if you consistently paid nothing more than your minimum balance.
This doesn’t even factor in continued use of your card. If you still have bills to pay and are still using your card, you are in a cycle of debt that you cannot get out of. Credit cards are not your friends. They are a tool to be used with caution and when needed. They are, unfortunately, designed to benefit credit card companies more than users. With interest rates as high as 20%, it is nearly impossible to free yourself of debt paying only the minimum payment each month. This can lead to frustration and also leave you with very few options should a real emergency come up.
Furthermore, paying the minimum won’t save your credit score. If you are using up most of your card’s limit, your credit score will still take a hit. Paying the minimum should be seen as just that – the bare minimum. It is not a way to free yourself of debt long-term.
2. Paying Your Bills Late
If you are unable to pay your bills on time, you will incur even more debt. Fees are often charged when payments are late. On top of the interest accumulated, late payment fees can continue to boost your debt up even more. This can happen when there are too many bills to keep up with. Life can sometimes throw a curveball your way. If you or a close loved one fall ill, you are just one step away from losing complete control of your debt. Paying your bills late is a common yet avoidable financial mistake you can and should eliminate.
As much as possible, you must ensure you pay your bills on time. If you find yourself unable to do this consistently, it’s time to consider consolidating your debt and relieving yourself of the stress. Late payments once or twice in your life won’t hurt – we all make mistakes and we all forget. But consistent late payments will not only add on to your growing pile of debt, but also impact your credit score.
3. You Are Paying Annual Fees on Credit Cards
When you are struggling with debt, you want to minimize your costs. Paying annual fees when you are already in a cycle of debt is ill-advised. This can simply add to your debt and your stress level. Instead, look for credit cards that offer cashback or rewards that you can benefit from. And best of all, they’re completely free. Paying an annual fee can be acceptable for some people. However, those struggling with debt are not in that category.
This financial mistake may seem like a small error, but it’s one that adds up very quickly over time. Anything you can do to eliminate unnecessary fees will help you reduce your debt. No matter what the rep on the phone tries to sell you, remember: no excess fees!
4. You are Dipping into Your RRSPs
Many Canadians turn to their investments, like RRSPs, to help pay off debt. Remember, there is tax and a penalty on all RRSP withdrawals that you make before you are eligible to. Plus, you are depleting your future savings. Many Canadians are unaware of the penalty that comes along with dipping into RRSPs. This financial mistake can actually make your debt worse. The fees associated with it are high and depending on how much you take out, it could cost more than you anticipated.
There are several other loans you can consider before moving to such a drastic measure. You can borrow from a debt consolidator, or even a credit line. If you do the math, you’ll see the cost is way less. Another issue to consider here is your retirement fund. It may seem like you won’t need it for ages, but the day will come quicker than you think. Today, you can work and earn a living.
At age 75, you may not be able to do so. You will have nothing to depend on but what you have saved up along the way. If possible, avoid taking money out of your RRSPs. In fact, you should be trying your hardest to put money in there! When you do, you receive a tax benefit. This can sometimes mean a hefty tax return payment that can go directly towards your debt. Instead, you could be managing your debt and saving for the future at the same time.
5. Your Credit Cards Are Maxed Out
You may think paying the minimum on your card will keep your credit score intact. It won’t. Part of your credit score takes credit usage into consideration. If you are using 80% or more of your credit card limit, your credit score will reflect it. Your credit score can prevent you from securing low interest loans. Interest rates play a big role in how quickly you can pay off your debt. If you are paying more interest than you need to be paying, you are losing even more money.
This financial mistake can be avoid. Take the necessary steps to budget accordingly to ensure you do not hit more than 80% usage on any of your credit cards. If that’s where you are, you should consider debt consolidation. Consolidating your debt will lower your overall monthly payments and help you get a handle on your debt quicker.
If you have more than one card maxed out, it’s a good time to seek debt help with an experienced professional and there are two reasons for this. One reason is that your credit score will take a hit. Another reason is that your debt will never go away. If your cards are maxed out you are paying interest every month and are likely paying excess fees for reaching or exceeding your total limit.
The next logical step for many is to request a credit limit increase. However, this will do more harm than good. Not only will it affect your credit score even more, it will also increase your likelihood of incurring even more debt. The cycle of credit card debt is not a good one to be in. Unless you plan to come into a large sum of money to clear out your debts completely, you need a backup plan – debt consolidation.
6. Keeping Too Many Credit Cards
The more credit cards you have, the more it affects your credit rating. It signifies an inability to manage credit, particularly if those cards have high usage. If you have five cards and all are maxed out, it is doing you no favours. More cards shows lenders that you have a higher capacity to incur debt. Credit limit is not the type of credit you want to have too much of.
Basically, if you don’t need more money to spend, you won’t need more credit cards. If you have a bunch of cards with a $10K limit each, you have the capacity to incur tens of thousands of dollars’ worth of debt. A car dealer, for example, won’t be too excited to lend you any more money.
If you do have several cards – as in more than two – then you definitely need to aim to keep the usage far below 80%. If your cards are being used too much, you are in a cycle of debt you likely won’t get out of very easily. Remember, credit cards are designed to make credit companies money – not to help you out.
7. Refinancing Your Mortgage
Homeowners may sometimes consolidate their debt by renegotiating their mortgage. This is another financial mistake you should avoid whenever possible. You should tread with caution when it comes to refinancing. Doing this too often can be very damaging to your credit score. Another downfall to using this option is that the bank certainly keeps track. If you are often renegotiating your mortgage and not paying down enough of your capital, the bank will be far less likely to help you out in the event of an emergency.
There are times when no matter how well you pan financially, you may need help. Unexpected emergencies or health catastrophes – or a worldwide pandemic, for example – could all derail your financial plans. You may need the bank to help you in that instance. Avoid renegotiating your mortgage regularly if at all possible.
8. Allowing Yourself to Go into Collections
When the collections agency comes knocking, you have to know you’re in dire straights. Not only are you looking at a debt you may not be able to pay, but your credit score is being affected. This financial mistake is one that not everyone takes very seriously. But rest assured, a collections agency looking for payment is not where you want to be. It is a sure sign your debt has grown too high and you can no longer manage or keep up.
If you’re struggling to stay afloat, there is seemingly no end in sight. Consolidating your debt can help you stop that debt dead in its tracks. Plus, your minimum monthly payments will be lowered and you won’t be suffering from the ridiculous interest rates that are often charged by credit card companies and private companies, like department stores, for example.
9. Opting for a Debt Settlement
In the event you are able to get a debt collector to reduce your total amount owed, don’t get too excited. Debt settlements do not look great on a credit report. This is another common financial mistake. It is much better to pay off your debts than to opt for a debt settlement, if possible. This will certainly impact your credit score and there is often a catch associated with it. It can make it nearly impossible for you to secure any other types of loans or credit cards in the future.
Instead, it is best to consolidate your debts. A debt consolidator will pay off all of your debts, consolidate the payments and reduce both the number of monthly payments you need to make and the interest tacked on. This can speed up the length of time it takes to pay off your total debt and preserve your credit score at the same time.
10. Not Having a Financial Plan
Not creating a budget before you get into debt – or not having a debt repayment plan in place – is a he financial mistake that too many people fall victim to everyday. Without a clear and concise plan for repayment or budgeting, it will be very difficult to make it out of debt. Ideally, you want to create a budget before accruing any debt to prevent debt accumulation. This will keep you on a steady path. However, one major emergency can throw that plan out the window in an instant and you may still find yourself in debt.
The key to getting out of it is having a plan for paying it back – a realistic plan. If you are creating a plan that doesn’t fit your budget, you won’t see your way out of your surmounting debt anytime soon. And you may also be losing even more money than necessary along the way. Instead, meet with a debt consolidator who can help you create a repayment plan that works with your needs.
The Solution
Most of the common financial mistakes outlined here are the result of one of three things. It can be due to poor financial planning, a lack of funds, or unforeseen circumstances. Sometimes, debt is completely unavoidable. During a global pandemic, we are seeing how easy it is to fall into the cycle of debt.
The real problem isn’t your debt. Rather, it’s how you deal with your debt that makes the difference in how you can get out from under it. Having late payments on your credit history or debt settlements is not the route you want to take. It can have many effects on your credit score that can follow you from seven to 10 years.
If you opt for debt consolidation, you can reduce your monthly payments. This can prevent you from getting caught up in a cycle of repeated late payments or surmounting debt.
Saying Goodbye to Financial Debt for Good!
If you’re considering debt consolidation, get in touch with us today. A financial planning expert will help you figure out a plan that works for your needs. This way, you can build a payment schedule you can adhere to.
This time of uncertainty has brought upon so much stress for everyone. Don’t let poor financial planning make things worse. Find out how you can free yourself from debt and go on to lead a more responsible life afterwards.