How to Get Ahead of Debt

Feeling overwhelmed by runaway debt? Learn how to get ahead of debt by avoiding five common mistakes.

We've all been there: Dreading to open that credit card statement; charging holiday gifts we don't have the cash to pay for. But just a few instances of irresponsible spending can add up to a big problem. Debt snowballs quickly, and you need to stop the problem at the source.

Constant overspending on frequent travel, dinners out, expensive clothing and the latest electronic gadgets may bring short-term pleasure but cause you long-term pain. Often, simply cutting back and living within your means can be enough for you to be able to take back control of your finances and get ahead of your debt.

Here are five unhealthy behaviors that can land you deeper and deeper into debt, followed by some simple fixes that can help you turn that debt around.

Mistake #1: Paying bills late
Solution: With so many convenient new ways to pay bills -- online, by phone or even through your cell or PDA -- there are more ways than ever to avoid late fees. So, no more excuses -- start making it a habit to always pay your bills as soon as they arrive. Otherwise, the penalty fees can add up. If you have three credit cards that charge a late fee of $25, and you miss paying by their due date twice a year, you're out $150 (plus any applicable interest charges).

Also, payments more than 30 days late can affect your credit score. Making sure you pay your bills on time will therefore help you build a better credit profile.

Mistake #2: Always paying by credit card
Solution: If you seriously want to get ahead of your debt, it's important to control your spending. One way to do this is to shop with cash or your debit card and leave the plastic at home.

For example, if a pair of sneakers cost $75 and you pay for them with cash or debit, they're still just $75. But if you pay for them with a credit card that charges a high rate of interest and you don't pay the card off on time, they can end up costing you considerably more - the initial $75 plus the interest charged by your credit card company (an amount that will continue to grow the longer you take to pay it off). Using cash makes budgeting easier and reduces paperwork.

Mistake #3: Having too many credit accounts
Solution: You wouldn't keep your cash in five separate bank accounts, so why treat your debt any differently?

Before opening another credit card account to pay for a major purchase, check into whether you can finance it in a less expensive manner. You may be able to get a much lower interest rate with a bank loan, line of credit or home equity loan.

Also, maxing out your credit limit on one or more cards is a signal to lenders that you may not be a good debt manager. Simplify and carry only one or two credit cards at most and try to use them as little as possible.

Mistake #4: Paying only the minimum amount on your credit cards
Solution: Credit cards are highly convenient. Just make sure you pay them off within 30 days. If you do carry a balance, make sure you pay at least a small amount over and above the required monthly minimum in order to pay the principal down faster.

If you consistently pay only the minimum amount -- often only two or three percent of the outstanding balance -- before you know it, you could be carrying several thousand dollars in debt and paying several hundred dollars a year in interest charges. Instead, try cutting back on lunches out by brown-bagging it to work or stop buying a morning coffee so you can use the money you save to pay more towards your credit cards each month.

Mistake #5: Buying a car with a small down payment and financing through the dealer
Solution: If at all possible, it's better to hold off on buying a new car until you can make a substantial down payment. The interest you can save over the long-term will be significant. Also, before accepting a dealer's offer of financing, shop around to see if you can get a better rate with an independent lender.

If you put $2,000 down on a $30,000 car and finance the balance at an interest rate of 7 percent over five years, you will be paying $9,800 in interest. Putting $7,000 down on the same car and financing it at the same rate, will save you $1,750 in interest.

Once you pay off your car loan, a great way to save for your next car or other large purchase is to put the same monthly amount you were paying the lender into a high-yield savings account. Since you're used to not having that money anyway, chances are you'll never miss it and you'll be surprised how fast it can grow.

Avoid all five of these mistakes and you'll be surprised how quickly you can start to get ahead of debt and begin to build a financial nest egg for the future.

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