4 Debt Reduction Mistakes to Avoid

Debt reduction is at the top of most people's priority lists today. Record levels of personal debt plague people from all walks of life. While it is critically important to take the necessary steps to get out of debt, you can do it the wrong way. There are certain things that you can do in the area of debt management that will sabotage your efforts. Here are a few debt reduction mistakes to avoid.

1. Settling Debt Too Easily

Settling a debt is a very common technique that a lot of people use. This involves negotiating with your creditors and getting them to take an amount less than what you owe. While this can save you some money, if you do it incorrectly, it could hurt you in the long run. Typically, a debt settlement will hurt your credit score. A company will report this as a settlement for less than you owed and it will stay on your credit report. If you negotiate carefully and not desperately, you may be able to avoid this. Ask them to remove any negative comments about your account from your credit report. If they want the money badly enough, they will give in.

2. Not Understanding Tax Implications

Many people do not realize that there are negative tax implications to settling your debt. Let's say that you owe a credit card $5000. You agree to settle the debt for $2000. While it may seem like you just made $3000, you actually have to pay taxes on the difference. The $3000 will be counted as taxable income and you will be required to pay. This could bump you into a higher tax bracket if you are on the border and end up costing you a lot at tax time.

3. Paying the Wrong Cards

Many people do not realize the impact that paying the wrong account off first can have. You should pay off the highest interest first. If you have three or four cards, you definitely need to at least make the minimum payments on all of them. However, any extra money should be applied to the highest interest card first. The sooner you can stop paying high interest, the faster you will get out of debt.

4. Transferring Large Balances

Transferring your smaller credit card balances onto bigger cards with an introductory zero percent APR can be a good idea if you do it right. However, some people fail to realize the impact that this debt management strategy could have on you in the long run. If the balances of the smaller cards add up to a very large balance, you probably will not be able to pay it off within the 12 month introductory period. Then you have a large balance on a card that charges you high interest again. In the meantime, you did not cancel your smaller cards and ended up putting a few small purchases on them as well. Before long, the temptation of multiple credit cards has got you in way over your head.

 


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