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Bad Habits That Can Lead to Financial Disaster

If you are like many American consumers you may be overwhelmed with credit card debt. The first step in getting out of a financial hole is admitting that you are in one. The next thing you need to do is figure out how you got there. Usually it's not one thing that suddenly plunges you into debt. In reality, it's countless credit decisions you make, big and small, which are not well thought out and can be extremely damaging to your financial well-being.

To begin the climb out of debt, you need to step back and recognize the money missteps you have made. By doing this, you can work on changing your spending habits and also recognize other financial areas where you need to make improvements.

You are not alone when it comes to having bad habits involving money. The ones discussed here are some of the most common blunders that people make. It will take time and discipline to change life-long spending habits. But the reward of being debt-free is a great incentive!

Bad Habits to Recognize and Break

  1. Not Checking Your Credit Report

    It's important to check your credit report at least once a year. You are entitled to one free report from each of the main credit reporting bureaus every twelve months. If you are ever denied credit, you may also request a free copy of your report. Number one, you want to check for any errors or discrepancies. Many people assume that they can't change anything on a credit report so why bother looking at it. But you always have the right to dispute inaccurate or outdated information and have it removed. Going over your report also alerts you to any signs of identity theft.

  2. Not Notifying Creditors When You Have a Financial Hardship

    The worst thing you can do is ignore a tough financial situation. Contact your creditors and explain what you are going through. Don't just stop paying your bills. Ask about lowering your interest rate or extending your payment due date. Many companies are willing to work with their customers by offering short-term services to help ease the financial strain.

  3. Not Having a Budget

    Financial security is virtually impossible without a workable budget in place. Unless you know where your money is going, you can't begin to make cuts and properly allocate your income. Creating a budget is as simple as getting a piece of paper and making two lists: income and expenses. Keep every receipt for a month so that you can really see where your money is being spent. All those daily coffees and lunches add up. Take charge of your spending habits.

  4. Not Having an Emergency Fund

    Saving is crucial if your goal is to be debt free. An emergency fund allows you to handle an unexpected event such as a medical bill or unplanned car repair without having to borrow money or use an existing credit card to cover the payment. If you're not in the habit of saving, start now. You can begin with a small amount and then increase it as your outstanding bills decrease. Most financial experts agree that $1000 is a minimum amount to work towards. Your ultimate goal should be to have between 3 and 6 months worth of monthly income stashed away for financial emergencies.

  5. Haphazardly Paying Your Bills Each Month

    If you have enough income each month to pay all of your expenses then this may not be a problem for you. But if you are juggling your bills and robbing Peter to pay Paul, you need to prioritize your bills. Your living expenses should always be paid first- this means your mortgage payment (or rent) and then your utilities, medical needs, and groceries. Next in line is your car payment. Further down the list are secured loans, then unsecured loans and credit cards. Don't risk losing the roof over your head.

  6. Living Beyond Your Means

    Trying to keep up with everyone else in the "most possessions" department is an exhausting (and dangerous) habit. The truth is, if you can't afford to pay cash for an item you really shouldn't buy it. Allow yourself a certain amount of cash to spend each week for those morning coffees, lunches and other purchases. When the money runs out, it's gone. Studies have shown that people who use cash to pay for items tend to be more thoughtful about what they buy and spend less than when using a credit card.

  7. Making Late Payments

    You may think it's only a late payment charge you'll be hit with on your next statement. But one late payment can trigger not only a late fee (generally upwards of $35) but also an overlimit fee if you've maxed out your credit card. Even worse, your credit card company can immediately raise your annual percentage rate to a ridiculously high number which means you will be paying even more in interest charges. Always know when your bills are due. Timely payments are critical to maintaining a good credit score.

  8. Paying the Minimum Amount Due

    Do you want to be paying off your old credit card debt forever? One good way to accomplish this is to make the minimum payment only each month. Do yourself a favor (and start freeing yourself from your credit card company) by paying as much extra as you can every month. Make cuts from other areas in your budget and use this additional money to pay down your credit card debt. The ideal situation is always to pay off the entire balance each month. This lets you avoid interest charges altogether and is a good indication that you are managing your money wisely. Remember that positive changes, however small, can bring big results.

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