Common Debt Traps and How To Avoid Them

When you’re in the process of trying to get your financial house in order, you’re bound to make some missteps that initially come across as good ideas. To save yourself the frustration (and likely some money), it’s best to familiarize yourself with common debt traps as well as strategies for avoiding them. That way, you can spend, save and invest with confidence.

Payday Loans:

Your back’s pressed against the wall, bills are almost past due, and you don’t want late fees and penalties to pile on. You decide to apply for a payday loan. Even if you don’t borrow a lot of money from a payday loan company, you have to recognize the fact that these loans often come with insane interest rates that turn a small loan into a giant debt. Sure, you may take care of one bill, but now you’re trapped in a payday loan cycle of borrowing more money to pay off your first loan or defaulting on a loan and getting hit with the very fees you wanted to avoid in the first place.

You’re better off going to a local credit union and applying for a more traditional loan. Just like with a payday loan, know what you’re getting into in regards to interest before you agree to anything.

Credit Cards With a Balance on Them:

While credit cards can be a great way to earn miles or get cashback, the best way to use them is to pay them off in full before your statement closing date. Learn the date when you need to pay off your balance before you’re hit with interest. By carrying a large balance or paying your balance off too late, you saddle yourself with even more debt. You also may pay an annual fee simply for having a credit card.

Besides paying off your credit card balance, there are more things you can do to use a credit card the right way. Make all payments early rather than on time to better avoid late fees, try not to use your card for a cash advance, and never charge more than your card’s credit limit. You should use your credit card rather than let your credit card use you.

Not Having Enough Insurance:

There’s no doubting it can be annoying paying for insurance every month that you can go a full year without using. That said, not having any auto, rental, home, or dental insurance whatsoever can cause you a great deal of stress should something happen, as financial leaders like Dave Ramsey, Don Gayhardt and Barbara Corcoran can tell you. You may also be tempted to increase your deductible to lower your monthly premiums, which isn’t a bad idea as long as you always have your deductible amount socked away in an account.

Rather than go without insurance or have a deductible you can’t pay if you have to file a claim, bulk up your emergency fund. That fund is meant to bring you peace of mind if worse comes to worst. Whether it’s losing your job, having to file an insurance claim, emergency car repairs or emergency medical bills, your emergency fund acts as a financial and psychological safety net.

Debt Settlement:

Debt settlement seems far from a debt trap, but it can be. The problem is that settling your debt has the potential to wreck your credit score, which can take a while to repair. Plus, if your debt is more than $600, it can be taxed. You also have to pay fees to settle your debt.

Rather than settle your debt, you can concentrate on making extra payments on your smallest debts to pay them off as quickly as possible. Once those small debts are paid off, use the money you would have spent on them on your larger debts, paying them off faster.

Watch your footing while making your way through the debt jungle. As you can see, there are a lot of traps out there.

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