Debt is like bacteria in the world of credit repair. While some is manageable and even healthy, too much can overtake and kill your credit score. According to a study conducted by the Federal Reserve Bank of Boston, the average household carries nearly $16,000 in credit card debt. This figure offers considerable risk to families who are struggling to make ends meet—or worse—surviving by living off their credit limits. No one plans for exorbitant debt or financial trouble, and the phrase, “How did I get here?” is uttered by thousands of people each year. Avoid joining them by steering clear of the common mistakes below. The need for credit repair is not an inevitability. Protect yourself by making smart choices early.
1. Buying (and borrow) things you can’t afford.
Impulse buying is the fastest way to increase your credit utilization ratio, inflate your debt, and escalate your vulnerability. If you are shopping for a home, an expensive mortgage is considered the most dangerous impulse of all. Signing on for a loan you cannot afford means signing on for years of financial hardship and risk. Defaulting on a home loan will destroy your credit score and end with foreclosure and the loss of your investment. When it comes to spending money, keep your short and long-term safety in check. Determine what you can afford and give yourself some breathing room—between 5-10 percent. Why spend to the brink of affordability?
2. Rationalizing a spending shift.
Rationalization is a slippery slope when it comes to debt. Justifications often sound like, “I’ll just spend less on groceries this month,” or “I’ll take two minute showers and spend more time with the lights off.” Desperation knows no limits when debt is on the line. It also offers no solace when you are facing bills you cannot afford. Be honest with yourself about the plausibility of self-imposed bargains. Will you really spend less on groceries? How much will you actually save by decreasing your home’s water usage? The answers to these questions offer clarity and security. Keep your common sense in use (and your lights turned on).
3. Relying on the “x” factor.
Work-related bonuses and raises are the benefits of a job well done. Unfortunately, these benefits may become liabilities if you aren’t careful. If your current purchases depend on the “x factor” of immaterialized cash, that bonus reward could turn into a debt in the blink of an eye. Ask yourself some obvious questions:
• What if I don’t receive a raise this year?
• What if bonuses are frozen to protect the company and avoid employee layoffs?
• What if I do receive a raise and/or bonus, but the amount is less than I bargained for?
In this economy, times are tough for businesses and individuals alike. Don’t put pressure on your finances by relying on hypotheticals. Base your budget on the resources you have and nothing more. Your credit score is strengthened by well-managed debt. Keep yours within the confines of wise spending.