7 Simple Things You’re Doing Wrong When Paying Off Debt

Debt Young businessman working on a computer in the office.

“Stop! You’re doing it wrong.” We’ve all heard those words, and they can be annoying. Yet, we may truly be doing it wrong, and experience could save us time, money or our lives. The same goes for paying off debt. There are mistakes to avoid and, in this case, doing so can save you hundreds to thousands of dollars.

7 common mistakes to avoid when paying off debt

Although these seven mistakes are the biggest to avoid, there are others. These will have the most effect on your ability to reach your financial goals faster while paying less in fees.

Not Lowering Interest Rates

You’re probably familiar with the Debt Snowball and Avalanche methods to pay off debt. Both are good strategies, however, when either is chosen as the sole method for paying off debt, your bank is the sole winner.

With both the Snowball and Avalanche methods, you either pay off your card cards with the highest interest rate first or pay off the card with the lowest balance first. In each case, the amount of interest you pay remains roughly the same.  

For example, if you’re paying off a $10,000 credit card balance at 18.0% interest over 15 months, you’ll pay about $11,240 in interest and principal until that credit card is completely paid off. If you lower your interest rate to 9.00% with a consolidation loan also for 15 months, you’d pay roughly $10,610 in interest and principal, saving a net $630 or $42 a month. If you did a zero-interest balance transfer with a 3.00% transfer fee, your total interest and principal payments would be $10,300, saving a net total of $940 or $62 a month.

If your total amount of debt is higher or you need more time than 15 months to pay off your loan, you’ll save even more by lowering your interest rate. So, focus first on lowering your interest rate rather than paying off your credit card with the highest interest rate or the smallest balance.

Pro Tip: Applying for multiple loans or credit card balance transfers is a “hard pull” on your credit report and can adversely impact your credit score. This could make it harder to secure a low-interest loan or credit card. Get your annual credit report, then search online or call ahead to banks or credit card companies before applying to see if there are credit score limits to apply for loans or balance transfers.

Paying High Fees to Debt Management Companies

There are hundreds of for-profit companies that claim to either eliminate or reduce debt. Many use nefarious practices, such as charging a high fee upfront with the promise of your debt being eliminated overnight or without you having to change your lifestyle. These offers take advantage of people who feel desperate about their debt. Be sure to fully vet any organization before working with them.

Just because an organization may be a non-profit, it doesn’t mean all their practices are appropriate. Confirm the credibility of any business with the Better Business Bureau and don’t rely on a logo or website as the authority of a company’s credibility.

Pro Tip: When working with a company that discharges a debt, note that the IRS views discharge as income and discharges should be reported on your taxes. This may eliminate some or all the benefits of discharging your debt.

Not Exercising Caution with Credit Card Balance Transfers

Balance transfers can be effective in lowering interest rates and speeding up the debt pay off process, especially with credit cards. Yet, they could cost you more in the long run because of balance transfer fees and high standard interest rates after the low-interest rate introductory period expires.

There are two important factors in determining whether a balance transfer is right for you. The first is the amount of debt you have and the second is how long it will take to pay your balance off based on the maximum amount of money you can put your debt each month towards. The answer to these questions will tell you on how often you’ll need to initiate a balance transfer and how often you would pay a balance transfer fee.

Below are two examples of two borrowers, one who can put $900 a month toward their debt and the other who can pay $400 a month toward their debt. Both qualify for balance transfers to zero interest credit cards for 12-month periods.

Debt
Payment per Month
Fees from transfer #1
Total
payments
Balance after 12 months
Fees from transfer #2
Total 
payments
Balance after 12 months
Fees from transfer #3
Balance after 3 months
Total Fees Paid
Borrower 1
$10,000
$900
$300
12
$0
n/a
n/a
n/a
n/a
n/a
$300
Borrower 2
$10,000
$400
$300
12
$5,500
$165
12
$865
$26
0
$491

In the above example, Borrower 1 pays a total of $300 in fees over 12 months. Borrower 2 ends up paying $491 in interest because of the multiple transfers. For Borrower 2, a slightly higher interest rate for a full 27 months would save them money and be less of a hassle.

Pro Tip: If you own a home, getting a home equity line of credit may be a good way to get a lower interest rate. Plus, if you itemize your taxes, you’ll get that interest reimbursed as a tax break.

Not Creating a Happiness Budget

Whether learning to play the clarinet, swim or pay off debt, if you don’t enjoy what you’re doing, you won’t keep it up.

Like those who hit the gym hard for a few weeks in January, then drop off like flies before seeing results, too many people create drastic budgets when paying off debt that eliminates every ounce of fun. No wonder as many end their debt-free journeys as end their gym memberships.

To avoid this, create a happiness budget. You know what makes you truly happy, what puts a smile on your face. It’s not the temporary caffeine or sugar rush from a Caramel Macchiato. Think of something longer lasting, like a fun date night you and yours will talk about for years. Another example is being able to quit your job and start your own business because you’ve saved a year’s worth of living expenses.

When creating your budget, build in necessities such as housing expenses, insurance, groceries and credit card payments. Then, add smaller needs like phone, internet, and car payments. Finally, fill in your budget with the occasional things that excite you. The latter will keep you motivated as you pay off your debt.

Pro Tip: Do a six to 12-month analysis of your spending. You’ll be surprised when you see where your money is going. It will help you see what you’re spending on that doesn’t make truly you happy and doesn’t give you the opportunity to become more conscious about future spending.

Trying to Sprint to the End Without Rewards

Many people forget that getting into debt, whether from student loans or reckless spending, rarely happens overnight. The same goes for getting out of debt.

Both getting into debt and getting out of debt are journeys. If you stick with paying off your debt, you’ll build the strength to master your money. If it were paid off in short order, better habits wouldn’t form, and you’d likely end up back in debt.

Some of these tips will help you pay off your debt fast but, you need a realistic plan; one that will likely take time to make you debt free. One of the best ways to stay on the journey of becoming debt free is having milestone rewards.

Milestone rewards are motivators that keep you on track to reach your financial goals. Some goals are time-based, others are dollar-based. For example, staying on or under budget for three months is a time-based goal. Paying off $2,500 of credit card debt is a dollar-based goal. When you achieve either, you’ll feel proud. So, reward yourself to stay motivated to keep going.

Pro Tip: Rewards shouldn’t wreck you or your budget. Celebrations aren’t celebrations when they come with a financial hangover. Treat yourself to a dinner out or take your spouse to a local concert. Add the reward to your budget and pay for it with cash.

Going At It Alone

Three Dog Night’s hit song, One is the Loneliest Number, came out in 1968. Even though it references love or lack thereof, it also applies to paying off debt.

When paying off debt, you’ll want a champion by your side when the going gets tough. You’ll want a partner to do low-cost and no-cost activities. You’ll want someone to revel in your successes, especially when you earn those milestone rewards.

If you’re in a relationship, make your accomplice the love you’re with. Having your significant other by your side when paying off debt will make all the activities you do better. If you’re not in a relationship, confide in a friend. Either way, they may also want to make financial progress of their own.

Pro Tip: If you’re struggling to find someone to be your accountability partner, read debt and money blogs. Many money bloggers have Facebook groups or communities on their sites to encourage members when paying off debt.

Not Addressing the Root Cause

The last and probably the most significant mistake when paying off debt is not determining the root cause of why you acquired debt in the first place. Were you raised with a “money is evil” story? Do you have insecurities you satiate with therapy shopping? Are you overly generous to impress or buy friends?

You’re not alone. These are some of the reasons we got into debt.

If you don’t address the psychological reasons you got into debt, it’s likely you’ll struggle with debt again in the future, much like fad dieters who gain their weight back.

Pro Tip: Uncovering your true feelings about money isn’t easy. The book, The Money Nerve: Navigating the Emotions of Money, by Bob Wheeler is a good resource for understanding the “financial histories that bind [you] to the past.”

You deserve an amazing life, one free from debt and financial insecurity. On your path to financial freedom, you can strike out on your own or learn from the mistakes and successes of others. These seven tips will help you achieve your financial goals faster and let you keep more money to start to grow your wealth.

Cheers to doing it right!

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