10 Crucial Debt Reduction Mistakes

Human beings are, by nature, impatient. Just like the process of losing weight, many people try to rush through the task of debt reduction and make costly crucial mistakes that ruin their entire debt reduction or debt management plan.

In this article, we will explain those 10 debt reduction mistakes that you should avoid:

1) Forgiven Debt is Taxable Income

If you have had a debt settlement agreement with your debtors where they wrote off your debt, this automatically creates taxable income for you! According to IRS Form 980, if you receive a debt settlement of $600 or more, it will automatically be reported to the IRS and the beneficiary of this settlement will have to include this forgiven debt in his taxable income. Therefore, if you have had a large portion of your debt forgiven, you should not be totally happy because you will have to pay tax on this amount!

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2) Destroying the Plastic

Some people burn or tear down their credit cards while others close them down in an effort to stop racking up more debt on them. If you absolutely cannot prevent yourself from impulse buying, then this is a good action. However, beware that, in case you lose your job or have an emergency such as an accident that makes you temporarily disabled to work, you will not have a credit card to bail you out. Of course, you would only need a credit card in this instance if you do NOT have any savings left over.

Also know that closing down your credit cards will temporarily lower your credit score, as your debt ratio will appear higher and the length of your credit history will be shorter. Furthermore, if you were to ever make a debt negotiation or debt settlement agreement with creditors, they would only consider open credit card accounts and NOT closed ones. Thus, do not totally burn or destroy your credit cards. Try to hide them in a place which is not easily accessible, so as to prevent impulse buying.

3) Statute of Limitations on Debt Collection

You can read more on this topic at Statute of Limitations on Debt Collection.

4) Pay This Bill, Ignore That One

When people become overwhelmed by their debt loads, they will pay one credit card bill this month, and leave many others unpaid. Then in the following month, they will pay the unpaid credit card bills from the last month, and ignore the credit card statements arriving in the current month. While this sure ruins your credit score, it also creates many late payment fees that you have to make, on top of the original debt you have to pay. If you check the right sidebar of this website under the header "Debt Consolidation Facts", we present the following fact:

If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

5) Ignoring Health & Car Checkups

debt reduction mistakesWhile trying to cut down on their monthly costs, some people will ignore and not go for example, perform an annual car maintenance check-up, an oil change, or an appointment with a dentist. While this might save you some money in the short term, it might lead to long term problems. For example, a car that has had not had an oil change for many months will eventually wear and tear out faster, and this will force you to spend big money on costly repairs. Once again, do not employ short-term fixes to your debt reduction plan, focus on the long-term ones.

6) Opening New Credit Card Accounts with Lower Interest Rates

In an effort to quickly reduce a portion of their debt, some people will transfer their debt balance owed from high interest rate credit cards to lower interest rate credit cards. While this will create more disposable income for you every month by lowering your monthly debt payments, it will not reduce your debt for the long term. Again, you are NOT treating the cause of your debt problems; you are merely employing short-term quick fixes that will get you into even more debt into the future. You might open multiple lower interest rate credit cards, only to max them out one by one. The result: more credit card debt!

7) No Debt Reduction Plan

We have mentioned this before in the other posts, many people will try to create quick fixes to debt reduction and reduce their debts for the short term. When you realize you are carrying a huge debt load, you will employ quick fixes that do NOT work; quick fixes such as cutting down your costs for the short term. You need to setup a detailed debt reduction plan for the long term and come up with a budget that helps you cut down on unnecessary purchases and spend your monthly income wisely. You need to MAKE more money than you SPEND, and put a portion of your savings into paying off your debt. This is the best way to reduce your debt!

Video: Lou Dobbs - American Debt

8) Consolidating Your Credit Card Debt into your Home Mortgage

Consolidating all your credit card debt by refinancing into a home refinancing loan or a 2nd mortgage is usually a good option if you want to lower your interest rates. However, it usually turns out to be a bad maneuver for thousands of people. Why? You are not treating the causes of your credit card debt; you are merely delaying payment of your debt that will get you into MORE debt in the longer term. You are therefore employing a short-term solution to reduce your debts, but at the expense of your home. What you need to do is identify the causes that got you into credit card debt in the first place. Then you need to tackle these causes and eliminate them. Then only can a home mortgage refinance loan work for you.

Debt Reduction Mistakes

9) Getting Influenced by Unsolicited Debt Reduction Mails

The only person that can reduce your debts is YOU! Millions of Americans receive countless unsolicited Debt Reduction mail in their homes everyday.  That they become influenced by them, and actually act upon what the mails tell them to do, is becoming a danger. These 100% debt reduction mails are pure scams and you should stay away from them! The people sending you these mails know that you are looking for a quick fix to all your debt problems. The reality is, there is NO QUICK FIX.

10) Ignoring Your Debt

Most people owing credit card or any other form of debt will try to avoid it as much as they can by not checking their credit card statements, avoiding analysis of debt burdens, etc. Speaking from personal experience, I once owed $8500 in student loan debt and 6 months after graduation, I had to begin making payments on these loans. Sure enough, I tried to ignore looking at my student loan debt statement as much as I could. But, you can NOT ignore your debt. The longer you ignore your debt burdens, the worse it will become. So be man enough, and tackle your debts.