There are a number of financial mistakes people make on a daily basis. There are times that these are the ones that brought them to debt in the first place. A number of bad money decisions in succession can quickly put you in a vortex of financial crisis. You would then find yourself in familiar debt territory and the vicious cycle of repayment starts all over again.
Apart from the debt payment mistakes you need to be aware of as you tackle your payments, there are also missteps you can make even after you have paid them off. They can just be as devastating as the ones you make while paying off your debt. Falling into this trap makes it difficult for you to try and reach for your financial goals in life.
There are a number of financial mistakes consumers make when it comes to money management. These could be the reason why the average household debt is over $60,000 according to Forbes. Though it is a manageable amount when you get the average salary and even assets of Americans, it is still a burden for some.
This is the reason why a lot of people do everything they can to pay off multiple debt accounts. From the student loan in college to their mortgage loan for the family. Once they are paid off, there are a number of things to look out for so you do not land back where you started. This will just make you repeat the process all over again.
Diving back into debt
It may seem to be a no-brainer but there are people who seem to quickly get back in debt just as quickly as they sent in their last payment. This is one of the financial mistakes you need to be vigilant about as soon as you pay off your debt. This scenario can happen when you least expect it for a number of reasons.
One of the reasons is that you might have this feeling of being deprived for so many years. This is a common feeling when you have been putting all your expenses under a microscope. You could have been making do with the bare necessities and not have a lot of room for the things that you want. Now that you have paid off your debt, you start buying things left and right which immediately puts you back in debt.
It is also possible that you are in a hurry to rebuild your credit and the first thing you do is charge a purchase on your card. You keep at it for some months and sooner or later, you are receiving statements from your lender with amounts close to your paid-off debt. You need to make sure that you do not overdo it which can lead back to debt.
Closing credit cards
One of the financial mistakes you might do after paying down your debts is to close all your credit cards. You might feel that it is the best way to get a fresh start in life and in your finances. It can also lower your chances of overspending since you cannot charge unplanned expenses anymore. However, this can also have a negative effect on your finances.
One thing you need to understand is that your credit cards carry a lot of financial history for you. That being said, that plays a big role in your credit score. It is proof that you have been borrowing and paying debt for a long time. Once you close that credit card, your score might take a significant hit because your credit history has disappeared.
Lack of financial goals
There are some consumers who suddenly lose all desire to plan for anything else as soon as they pay off their financial obligations. As soon as this happens, they would not have any direction which can quickly put them back in debt. There are people who refocus their effort in spending money which is not ideal especially after paying off debt.
One of the things you can do is to focus your energy on strengthening specific funds in your budget. It can be your retirement account or even your reserve funds. This way, the funds that have been freed up from paying off debt obligations can be channeled towards those accounts. Not only will they be able to strengthen those funds but they get to work within the same budget and stay away from the temptation to spend.
Not checking credit reports is one of the common financial mistakes people make
You might think that you would have no need to look into and check your credit report simply because you have paid off all your debt accounts. It might not be that too important since you now have a clean slate and your credit report should reflect that. This is the ideal result and one that you might expect in a real world.
However, the reality is that credit reporting bureaus, as well as lenders and other reporting entities, can and will make mistakes. This is one of the things you need to look out for even on a regular basis. You might be carrying that low score because of the mistakes of others. As a result, you are not able to enjoy the benefits of a high score.
If you have recently paid off a number of debt obligations, it is also a wise move to get a copy and check your credit report. For one, you need to make sure that your lender reports the payment and any other payments before that. This goes to your payment history and bumps your score up as well. As soon as you notice a mistake, report it immediately so they can take action. Not checking and reporting errors in your credit report is one of the financial mistakes people make after they have paid off their debt payments.
Not changing your mindset
It is easy to fall trap to debt over and over again if you do not change your ways. You can pay off your credit cards every month and be in debt again the following week if you do not change your ways. One thing you can look into is how you view credit. You might have this notion that it is money you own but in fact, it is more of a short-term loan by your lenders.
As such, it is subject to charges, penalties and interest payment when you miss a payment. This is where your payment amount balloons up and it starts to wreck your budget. The more you are unable to make a payment, the more these charges grow. Make sure that you start to be more responsible for credit use and pay them in full everytime.
Making minimum payments can also lead to bigger payments down the line when you start to factor in interest on the card. It might seem small and a more manageable option especially when you are already running on a tight budget. However, this will slowly eat up on your budget over time because you tend to pay more due to that interest payment.
There are a number of financial mistakes you can make even when you just got out of paying down your debts. The important thing is to learn from your previous mistakes and be more cautious with how you use credit. It will also help if you start to pay more attention to your household budget and be able to stay on top of your finances.