The welfare state has led many families to choose to take on debt, or in other words, to apply for a loan or credit. According to experts, there are certain common mistakes among those who take on debt, both when repaying the loan and when applying for it. Having a credit card, paying interest, and participating in “buy now, pay later” programs can all be ways to enter a vicious cycle that is sometimes difficult to escape.
While this gives the impression of making progress, it actually barely reduces your balance
One of the most common mistakes when applying for credit is limiting yourself to only making the minimum payment on your credit cards. While this gives the impression of making progress, it actually barely reduces your balance. Adding even an extra $25 each month can significantly shorten your payoff time. We sometimes tend to think that the less we pay, the less we’re paying, even though it may seem redundant. But the reality is that we end up paying more.
This can be mitigated by applying for a loan and believing that choosing longer repayment terms will make it more comfortable to pay off the loan. While this is an alternative to reducing the monthly payment and being less tight, it’s not the best financial option: in this case, too, the longer the repayment term, the more interest we pay. The shorter the period of time you’re in debt, the better. Interest is something many people don’t consider when considering the significant amount a loan can add to the initial price.
Simply going back into credit card debt can immediately erase the progress made
Another common mistake is taking on more debt than we can handle, especially without having paid off previous debts. Using personal loans, “buy now, pay later” programs, or simply going back into credit card debt can immediately erase the progress made. Although we may feel like we’ve paid off most of the debt, the truth is that adding one more debt, no matter how small, ends up being another debt. It’s advisable to wait until you have a solid plan before opening new lines of credit. This can also be avoided by trying to borrow more money than we need. Asking for a larger amount “just in case” is one of the most common mistakes. Although it may be tempting to take a little more, keep in mind that the larger the loan, the more interest you’ll have to pay.
Error: to use your savings (or emergency) fund to pay off your balance faster
Not adjusting spending habits is also a common mistake. Paying off a balance is of little use if you continue spending the same way. Cutting back on eating out, eliminating unnecessary subscriptions, or finding extra income are key steps to prevent debt from resurfacing or feeling like you’re drowning at the end of the month. It can also happen, for example, that a rebound effect of the previous case is to use your savings (or emergency) fund to pay off your balance faster. Although it seems like a practical solution, running out of savings exposes you to unforeseen events that could force you to resort to credit again, repeating the cycle and returning to the vicious circle we mentioned earlier.
Taking on more debt and not seeking counseling can also be mistakes that end up costing more than we thought. There are credit counseling agencies that offer debt management plans to reduce interest, cards with 0% APR promotions for balance transfers, or even companies that negotiate lower payments. Therefore, the best thing to do is to exhaust all options, inform ourselves as best as possible, and with all the facts at hand, choose the option that best suits our situation.
