Five Bad Habits that Lead to Debt
Getting out of debt is difficult, and the best way to do it is to avoid it in the first place. Believe it or not, you may be doing some simple things every single day that are causing your debt – even if you don’t realize it. Here are five bad habits that may be costing you.
#1 – Not Living Within Your Means
The phrase “living within your means” simply refers to not spending more than you make. Believe it or not, it’s easy to get in over your head by taking on seemingly small monthly payments. Every so often (once per season) sit down and figure out your budget. Add all your monthly expenses together, including what you spend on food, clothing, and household products, and subtract this from your total monthly income. If you’re spending more than 70% of what you earn, you’re not living within your means – and this can cause debt.
If you are living beyond your means, there are ways to cut your spending that won’t hurt as much as you might think. For example, you can cut back on your mobile phone services, pare down your television channel selection, eat at home more often instead of getting takeaway, and more. Ideally (though not always possible!) you should have 30% of your income left over at the end of the month, so put at least half of that into an interest-bearing savings account.
#2 – Spending Money You Don’t Have Yet
Window shopping is fun, and there are probably lots of things you’d really like to have. Stores know this, and that’s why so many of them offer lines of credit. These allow you to get what you want today and pay for it later – with interest, of course. However, your best bet is to save your money until you can afford to buy it outright. There are two primary reasons for this.
First, when you buy items with store credit, you’ll end up paying more for them in the long run. A £50 sweater could easily end up costing you three times that amount if you do not pay down your credit balance right away due to accrued interest. Second, it’s easy to get carried away with store credit. Because you don’t have to pay for things right away, you’re more likely to spend more than you can afford.
#3 – Buying Everyday Things with Credit Cards
Credit cards can certainly be helpful, but only when you use them properly. If you want to avoid getting into significant debt, you should only use your credit cards for things you need, but you don’t have cash on hand to buy. For example, if you need to buy a new refrigerator, it might be a better option to use a credit card than to pull money out of your savings account, especially if you can pay off the credit card bill relatively quickly.
All too often, people buy everyday things with their credit cards. You should pay for things like your morning coffee, your dinner at a nice restaurant, your mortgage payment, and even your groceries with your money rather than with a credit card. This way, you won’t be charged interest on them, and you’ll reduce the likelihood that you will end up in debt due to an inability to make more than the minimum payment on your credit card.
#4 – Going into Debt to Pay Down Debt
You might think that using your credit card to consolidate other debts is a great idea, but the truth is that you really aren’t doing anything but reducing the number of payments you make. For example, if you have three credit cards, and you transfer the balances from two of them to a single card, you’ll still have to pay off that debt – and you might have added fees for the balance transfer, too.
Of course, this isn’t to say that you should never transfer your balances or pay off loans with credit cards. If you’re offered a credit card with a 0% introductory APR and fee-free balance transfers, it can benefit you a great deal to move those balances over if you can pay them off within that introductory period. You can also use cards like these to pay off car loans or other high-interest loans. However, if you choose to transfer balances from credit cards that have high interest rates, consider cancelling those cards when you’ve done so. This way, you won’t be tempted to use them again, and you won’t find yourself in significant debt.
#5 – Using Credit when You Have Cash
For many people, it’s become a habit to simply swipe their credit cards when they pay for something, or to automatically charge their credit accounts when they shop online. If you have the cash in hand to pay for something, or if you can debit that purchase from your bank account, you should never use your credit card. All too often, people get into the mindset that they can get products or services without paying for them simply by producing a credit card, but this is not at all the case.
In fact, continuing to use your credit card for everyday purchases can end up causing you to pay far more for items. For example, if you buy a £5 breakfast five days a week for a month, that’s £100 you’ve put on your credit card. Your credit card company is going to charge you interest, too. This means that the £5 breakfast may end up costing you £10 or even £15 in the end, and you could have saved that money simply by paying with cash.
As you can see, there are plenty of bad habits that can add to your debt, and you may not even realize it. For the most part, don’t use credit when you have cash available to you, and make sure you’re living within your means. This way, you can afford the things you need and save your own money for the things you want.