In college I found myself in credit card debt and still haven’t forgotten how helpless I felt as I watched interest charges pile up. Since this experience, I’ve vowed to never let that happen again.
Don’t repeat your money mistakes. Here’s the top 10 blunders to avoid making a second time.
1. Ripped off buying a car
New car buyers might drop into the dealership on a whim and buy on the spot, falling for all the sales tricks. This includes negotiating financing based on monthly payment or getting too little for a trade-in.
Do the research before you go. Find out what others are paying, and show up prepared to negotiate. Get pre-approved for a loan from a bank or credit union to avoid financing at the dealership. Turn down the extras that aren’t worth the cost, like paint sealant and protective undercoating.
2. Making a late payment
While bankruptcy and foreclosure can cause significant credit score damage, the effect of a late credit card payment isn’t far behind. Just one late payment reported can drop your credit score by more than 100 points. Fees are about $25 when your payment is late, too, and you may see your interest rate increase.
The easiest way to avoid these penalties is to set up due date reminders and automatic payments.
3. Cosigning a loan
Many experts recommend against cosigning on loans, and it’s not hard to see why. When you do, you’re putting your credit on the line and depending on someone else to make payments on time. When they miss payments, lenders can come at you for the balance and your credit can suffer.
Skip cosigning whenever you can. Consider offering budgeting help or gifting money instead of risking your credit.
4. Charging more on credit than you have in cash
Credit cards can be a useful tool as they often make life easier. But using credit cards can go bad, and getting into debt is a major risk for card users. Debt can pile up when charging more on your card than you have in the bank with the plan to pay the bill later.
This is a bad strategy, as credit card interest rates can be incredibly high. Getting out of credit card debt can take much longer than imagined, too. Paying the minimum on credit cards can leave you in debt for a decade or more.
Keep your spending on credit in line with what you can afford to pay off immediately, not what you to plan to pay once your paycheck comes in. If you can’t, consider sticking with debit cards and cash only.
5. Believing expenses are fixed
Budgeting isn’t easy, and seeing where you can cut costs can be challenging. But there are almost always ways to trim the fat, even when expenses seemed fixed.
Your budget probably doesn’t include as many “fixed” expenses as you assume. Grocery bills can be cut down. Entertainment including cable and restaurants can be cut out. Car payments can be eliminated by scaling down.
Remember: many expenses are a choice. If you need to save money, think creatively and leave nothing off the table.
6. Over-borrowing for college
Many college students don’t stop to think about how much money they’re borrowing. Once federal loans are maxed out, students might move on to private loans that have less-flexible repayment terms. While this may seem like a “worry about it later” issue, students are then stuck with big bills after graduation.
Instead, take a look at how much you’ll have to pay after college. Calculate monthly payments ahead of time using student loan calculators and determine how much in loans you can handle with your expected after-college income.
7. Lending money to family
Everyone has good intentions when lending money to friends and family. It’s hard to see where it can go wrong when you’re just looking to help them out, especially when they need it most.
But there are many potential problems, especially when the terms aren’t written down and recorded. If they stop paying, not only is your money on the line but your relationship is in jeopardy, too.
The best bet is often to avoid these situations altogether. Never loan money you can’t afford to lose, and be prepared to deal with any fallout if things go bad.
8. Forgetting to check the fees
Fees for credit card and bank accounts are common “gotchas.” Consumers might not find out about fees until they’re charged. At $25-$35 per overdraft or late payment, the costs can add up.
Take a quick look at the fine print for your accounts. Just a couple minutes could save you a bundle down the line.
9. Underfunding a retirement account
Hearing others complain about not making enough but finding out they’ve turned down a 401(k) match from their employer makes me cringe. That’s free money!
The major problem with skimping on retirement saving: it can’t be undone. If you miss the IRA contribution deadline for the year, you can’t go back and change this. The same goes if you’ve missed out on a 401(k) match from an employer.
Take advantage of retirement accounts, especially when you’re getting free money or investments can grow tax-free.
10. Neglecting a credit score until you need it
An excellent credit score can save a ton of money. But you can’t wait until you need a loan to starting thinking about how to improve your credit.
Bringing up your score often takes months or years. Work on building or maintaining your score constantly so you’re prepared to get the best rates once you need to borrow.
(image: Alex E. Proimos)