10 missteps that will plunge you into debt

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It is that time again when we look at the old year and say that we will do more, better, smarter things next year; that the sins of the past will forever be buried and having learned many painful lessons, we shall become new men and women.

Ha! Fat chance.

In a life that seems to get more complicated rather than less; harder rather than easier and more competitive as we get less so, I want to offer some basic and simple tips that might help you exit 2006 with a bit more in your pockets than when you entered.

So with a tip of my hat to Florenz Ziegfeld, here are my follies for 2006.

Folly No. 1: Paying the minimum only. The government has already told you that smoking is bad, well this year it said minimum payments on credit cards are bad, too. New regulations will increase your minimum payments. This is to force people to pay off their debt in a ‘reasonable’ period of time. Even with the new guidelines, paying only the minimum can take up to 10 years to pay off.

Folly No. 2: Using credit to extend your income. One of the reasons that clichés are used so often is that they are actually true. When your mother told you to “live within your means,” she gave you sound financial advice. If you are using credit for basic living expenses like groceries, look down; you may have one foot on a banana peel.

Folly No. 3: Charging with no plan to pay off the balance. Did you know that the caveat “stop it or you’ll go blind” referred to using credit without a plan to pay the debt back? To practice safe credit, have a plan to pay your balances in full within 90 days.

Folly No. 4: Believing defaulting on unsecured debt isn’t that big a deal. Unsecured debt is not secured by your car or home, but the creditor does have ways to legally collect the debt. You can be taken to court and have your wages attached. It can be harder to get a job, promotion or insurance. And at a minimum you will be hounded day and night until you pay or drop dead. One collector told me that there is some evidence that St. Peter buys dearly departed defaults and adds the balance on to your admission fee at the pearly gates.

Folly No. 5: Paying late and getting hit with high fees. The average late fee is now around $32, and many card issuers charge $39 for late payments. They also have a special default rate of 30-percent plus. The two together can make your minimum payment huge. If you are paying late because you are unorganized, get organized. If you pay late because you can’t afford the payment, get help.

Folly No. 6: Expecting your ex-spouse to pay joint debts. If you live in a community property state, and even if you don’t, you have to still believe in the tooth fairy to think your ex will make good on the debt assigned in the divorce decree, after failing to make good on your marriage vows. All joint credit, regardless of who is assigned to pay what, will affect both persons’ credit histories. If possible, move balances to cards that are in only the name of the person who is responsible for the debt.

Folly No. 7: Being blissfully unaware of how much you owe. Head-in-the-sand syndrome is not helpful when it comes to debt. When I’m overweight I might not look in the mirror, but I still get on the scale. You need to keep track of how much debt you have and have a plan for paying it off.

Folly No. 8: Having no savings cushion. One of the easiest ways to prevent accumulating unwanted debt is to have an emergency savings cushion. When the car breaks down or the refrigerator gives out you’ll have money available to cover the costs instead of having to put the needed repairs or purchase on a credit card. This one is not optional; you have to save something, no matter how little.

Folly No. 9: Borrowing from your retirement. Loans from 401(k) accounts are becoming popular ways to pay down debt. What you are really doing is paying for your debt out of your retirement. If you can’t afford the payment now, it’s pure folly to think you will be able to afford it later when your income drops.

Folly No. 10: Taking on someone else’s debt. Co-signing a loan or giving money to adult children to pay down a debt is my last folly. By co-signing, you open up your credit to problems. When they default and don’t tell you, your credit is damaged and you get to pay the bill. Give the kids money and they may never learn to save or live within their means. Keep in mind that the person asking for help is in trouble for a reason. The best you can offer is help in fixing the underlying cause, not paying their debts.

Happy 2006, and good luck.

Bankrate experts’ advice
Repeating your money errors of the past is a sure way to personal finance wreck and ruin. Here, Bankrate columnists identify their picks as the worst mistakes you can make when it comes to your finances, along with tips on how to avoid them next year.
Thrifty 60
  1. 10 big bankruptcy blunders
  2. 10 missteps that will plunge you into debt
  3. 10 real-estate wreckers
  4. 10 terrible tax mistakes
  5. 10 top money errors
  6. 10 miscues when dealing with debt collectors

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.