(April 11th,
2007)
Humans beings are impatient. Just like the
process of losing weight, many people try to rush through their
tasks of debt reduction and make costly crucial mistakes that
ruin their entire debt reduction or debt management plan. In
this article, we will explain those 10 debt reduction mistakes
that you should avoid:
1) Forgiven Debt is Taxable Income
If you have had a debt settlement
agreement with your debtors where they wrote off your debt,
this automatically creates taxable income for you! According to IRS Form 980, if you receive a
debt settlement of $600 or more, it will automatically be reported
to the IRS and the beneficiary of this settlement will have
to include this forgiven debt in his taxable income. Therefore,
if you have had a large portion of your debt forgiven, you should
not be totally happy because you will have to pay tax on this
amount!
2) Destroying the Plastic
Some people burn or tear down their
credit cards while other close them down in an effort to stop
racking up more debt on them. If you absolutely cannot
prevent yourself from impulse buying, then this is a good action.
However, beware that incase you lose your job or have an emergency
such as an accident that makes you temporarily disabled to work,
you will not have a credit card to bail you out. Ofcourse, you
would only need a credit card in this instance if you do NOT
have any savings left over.
Also know that closing down your credit
cards will temporarily lower your credit score, as your debt
ratio will appear higher and the length of your credit history
will be shorter. Furthermore, if you were to ever make
a debt negotiation or debt settlement agreement with creditors,
they would only consider open credit card accounts and NOT closed
ones. Thus, do not totally burn or destroy your credit cards.
Try to hide them in a place which is not easily accessible,
so as to prevent impulse buying.
3) Statute of Limitations on Debt Collection
You can read more on this topic at Statute
of Limitations on Debt Collection.
4) Pay This Bill, Ignore That One
When people become overwhelmed by
their debt loads, they will pay one credit card bill this month,
and leave many others unpaid. Then in the following
month, they will pay the unpaid credit card bills from the last
month, and ignore the credit card statements arriving in the
current month. While this sure ruins your credit score, it also
creates many late payment fees that you have to make, on top
of the original debt you have to pay. If you check the right
sidebar of this website under the header "Debt Consolidation
Facts", we present the following fact:
If you
miss 1 or 2 payments on your credit card debt, the issuing company
will skyrocket your interest rate to a whopping 27% - 30%!
5) Ignoring Health & Car Checkups
While trying to cut down on their
monthly costs, some people will ignore and not go for example
an annual car maintenance check-up, an oil change, or an appointment
with a dentist. While this might save you some money
in the short term, it might lead to long term problems. For
example, a car that has had not had an oil change for many months
will eventually wear and tear out faster, and this will force
you to spend big money on costly repairs. Once again, do not
employ short-term fixes to your debt reduction plan, focus on
the long-term ones.
6) Opening New Credit Card Accounts With Lower
Interest Rates
In an effort to quickly reduce a portion
of their debt, some people will transfer their debt balance
owed from high interest rate credit cards to lower interest
rate credit cards. While this will create more disposable
income for you every month by lowering your monthly debt payments,
it will not reduce your debt for the long term. Again, you are
NOT treating the cause of your debt problems, you are merely
employing short-term quick fixes that will get you into even
more debt into the future. You might open multiple lower interest
rate credit cards, only to max them out one by one. The result?
More credit card debt!
7) No Debt Reduction Plan
We have mentioned this before in the
other posts, many people will try to create quick fixes to debt
reduction and reduce their debts for the short term. When
you realize you are carrying a huge debt load, you will employ
quick fixes that do NOT work; quick fixes such as cutting down
your costs for the short term. You need to setup a detailed
debt reduction plan for the long term and come up with a budget
that helps you cut down on unnecessary purchases and spend your
monthly income wisely. You need to MAKE more money than you
SPEND, and put a portion of your savings into paying off your
debt. This is the best way to reduce your debt!
8) Consolidating Your Credit Card Debt into
your Home Mortgage
Consolidating all your credit card
debt by refinancing into a home refinancing loan or a 2nd mortgage
is usually a good option if you want to lower your interest
rates. However, it usually turns out to be a bad maneuvre for
thousands of people. Why? You are not treating the
causes of your credit card debt, you are merely delaying payment
of your debt that will get you into MORE debt in the longer
term. You are therefore employing a short-term solution to reduce
your debts, but at the expense of your home. What you need to
do is identify the causes that got you into credit card debt
in the first place. Then you need to tackle these causes and
eliminate them. Then only can a home mortgage refinance loan
work for you.
9) Getting Influenced by Unsolicited Debt
Reduction Mails
The only person that can reduce your
debts is YOU! Millions of Americans receive countless # of unsolicited
100% Debt Reduction mails in their homes that they
become influenced by them, and actually act upon what the mails
tell them to do. These 100% debt reduction mails are pure scams
and you should stay away from them! The people sending you these
mails know that you are looking for a quick fix to all your
debt problems. The reality is, there is NO QUICK FIX.
10) Ignoring Your Debt
Most people owing credit card or any
other form of debt will try to avoid it as much as they can
by not checking their credit card statements, procrastinating
their analysis of debt burdens, etc. Speaking from
personal experience, I once owed $8500 in student loan debt
and 6 months after graduation, I had to begin making payments
on these loans. Sure enough, I tried to ignore looking at my
student loan debt statement as much as I could. But, you can
NOT ignore your debt. The longer you ignore your debt burdens,
the worse it will become. So be man enough, and tackle your
debts. |
