Debt in America is rising and has reached unprecedented levels. In fact, during the first quarter of 2017, the level of household debt held by Americans breached the high water mark reached during the Great Recession that began in 2008. During that time, many consumers suffered greatly as the financial meltdown took hold and bankruptcies skyrocketed. Credit scores plummeted, and many consumers lost their access to available credit. Now, almost a decade later, consumers have seen their credit scores rebound and lending practices eased. This has set the stage for a sharp rise in consumer debt.
Today, falling into debt is all too easy. Credit is readily available for most consumers, and the temptation for instant gratification is powerful. Buying now and paying later is a common sales strategy used by many retailers (because it works!). However, there are other, less obvious ways to fall into debt. Here are five common debt pitfalls every consumer should avoid.
1. Chasing after credit card points and rewards
Although some consumers can effectively utilize credit card rewards and points to their advantage; for the vast majority of consumers, chasing credit card points becomes a pathway to accumulating debt. If a consumer is not prepared or able to pay off the balance in full every month, credit card points become a losing proposition. Cards that offer points and rewards usually come with a higher interest rate, so, if a consumer is carrying a balance, he or she will be minimizing the benefits received due to the interest accruing each month.
Something else to consider is the actual value of the points received for purchases. For most of these credit cards, the points are not really worth very much. For instance, to get a $25 gift card, a consumer would probably need to use about 2,500 points. Even if the consumer receives a point for every dollar spent the credit card, he or she will need to spend $2,500 to realize a 1% return ($25). If the balance isn’t paid off immediately, the interest charged will far surpass the benefit. Credit card companies are not in the business of giving things away free. You will pay for most of the “rewards” you receive, and then some.
2. Buying a new car instead of a used car
There is a certain allure to driving a new car off the lot. Car manufacturers are very good at producing commercials that glamorize and romanticize owning a new vehicle. However, buying new will cause consumers to pay more than they should and put them in a deficit situation with the car immediately. It is a well-known fact that the moment a new car leaves the car lot, it depreciates significantly. This means that, unless the consumer has made a significant down payment, he or she will most likely be upside down on the vehicle from day one, owing more than the car is worth.
However, even if a consumer does make a large down payment on a new car and ends up being even on the value or has a little equity, the individual has essentially just given the down payment away. Consumers should consider buying a slightly used car that is a year or two old instead of buying new. That way, the depreciation has already occurred and the consumer will pay an amount much closer to the actual value of the vehicle. This will result in lower payments and a quicker payoff. Beware the car salesperson who only wants to talk about monthly payments and not terms, such as the length of the loan and the interest rate.
3. Going into a lot of debt is the only way to get an education
Getting a good education is certainly an important part of securing a good financial future. However, taking out a lot of student loans to get that education is unwise. There are many ways to get through school without taking on a mountain of debt. Students should consider taking online classes that will allow them to continue to work full time. Working full time may provide benefits such as tuition reimbursement and healthcare that can lower everyday expenses and help pay tuition costs. Online courses are usually more economical and flexible, which helps those working full time to manage their time better.
Applying for assistance in the way of grants and scholarships is another great way to help pay for college without taking out a large amount of student loan debt. Many students are unaware of the opportunities that are available to them. Searching online and talking to school administrators can help. Trade schools and 2-year programs offer tremendous career opportunities for a lot less money than a 4-year degree. In addition, the added advantage of getting into the workforce quickly gives a student a leg up in moving forward.
4. Believing that you have to have it all now
The American Dream is a powerful concept that means something different to almost everyone who aspires to attain it. However, most consumers who are trying to achieve it believe that the quicker they attain their version of the American Dream, the better. Many go into serious debt trying to get there but, in actuality, acquiring the American Dream while going into a large amount of debt is a dream built on a house of cards.
Exercising discipline and living within one’s means is the right path to building a solid foundation upon which a long-term financial plan can materialize. Buying a house that is more than a consumer can afford can lead to the accumulation of other debt simply because there isn’t enough money to make ends meet. Consumers need to be patient about what they are able to acquire and when, and realize their dreams in a way that makes good financial sense.
5. Failing to make a budget and control everyday spending
Most Americans never learned how to formulate a budget or manage their money. Unfortunately, these are not skills taught, traditionally, in school. Therefore, many consumers get into financial trouble simply because they don’t know the fundamentals of financial management. The good news is that many good tools exist on the Internet to help consumers build a budget and better manage their money.
It’s important for consumers to understand where they are spending their money every month and to direct as much as they can to savings. This can protect their financial well-being and guard against emergencies and unexpected expenses. Often times, consumers do not understand the financial trouble they are in until they need some serious financial intervention. If this is the case, they may end up consulting a debt management company such as National Debt Relief to help them resolve their debt problems through debt settlement or debt consolidation.
Avoiding these common debt pitfalls will go a long way toward building a solid financial future. Being smart with money and making good decisions along the way will help consumers build a great financial foundation that will enable them to achieve all of their dreams.
