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Did you receive a threatening phone call from a debt collector recently? Or worse yet, maybe you received several threatening phone calls. Even if you don’t have a debt collector harassing you, you feel terrible about your debts. You may be plagued by worries or by the fear that you will never be able to get those debts under control. The good news is that you may be able to eventually become debt free but only if you don’t make these mistakes.
Mistake #1: Skipping payments
One of the biggest mistakes you can make in dealing with your debts is to skip payments. If you have missed payments, this is probably why you’re either getting calls from debt collectors or soon will be. Missing payments also have a very negative impact on your credit score. In fact, 35% of your credit score is based on how you have used your credit, meaning whether or not you made your payments on time or missed payments.
Mistake #2: Making only the minimum payments
Do you know what credit card companies really want? It’s for you to make just the minimum payments on your debts? This is because they know if you do this, you’ll end up paying them a lot more money than if you were to make, say, double or triple the minimum payments required. Here’s an example of what I mean. If you owed $10,000 in credit card debt at a 20% interest rate and paid a total of $200 a month, it would take you a bit more than nine years to clear that debt. And if you pay just $100 a month, which could be your minimum payment, you would literally never get out of debt.
Mistake #3: Using too much of your available credit
A second factor in how the three credit bureaus calculate your credit score is based on what they call your “credit utilization.” This is a ratio that represents the difference between the total amount of credit you have available and the total amount you’ve used. If you have $20,000 in credit available but have utilized $15,000 of it, your credit utilization ratio would be 75%, which is much too high. Most financial experts say that you should not have a credit utilization ratio of much more than 35%. And, of course, the lower the percentage the better. If you want to increase your credit score, you need to pay off as much of your debt as you can to get that utilization ratio down to 35% or less.
Mistake #4: Not being proactive
Don’t make the mistake of waiting for your creditors to contact you. Be proactive. Once you realize you’re in trouble, start contacting your creditors. Most will be willing to work with you. It’s in their best interests as well as yours to help you cope with your debts. They might offer you a timeout of several months, which would give you time to get your debts organized and caught up with your payments. Or they might offer to reduce your interest rates. The net/net is that most lenders will try to help you if you’re proactive and contact them, rather than waiting for them to start dunning you.
Mistake #5: Embracing the Ostrich paradigm
You know what ostriches do when they sense danger. They stick their heads in the sand. The biggest mistake you can make with your debts is to stick your head in the sand and refuse to deal with them. Debts just don’t go away. They’re like the ghost of Christmas past. They’ll just keep coming back to haunt you. If you try to ignore them, your creditors could sue you. If they choose to do this, they will probably be able to get a judgment and put a lien on one of your assets such as your house. Then when you sell the house, the lien would come off the top of any cash you had coming. For example, if the lien was for $10,000 and you had a profit of $30,000 on the sale of your home, you would end up with only $20,000.
