7 Reasons Why Your Debt Repayment Plan Isn’t Working

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People across the nation are charging more on their credit cards, signaling growing confidence in the economy.

Says credit bureau Equifax:

Equifax’s new National Consumer Trends Credit Report revealed that consumers in each of the nation’s 25 largest metropolitan areas increased credit card debt in the second quarter of 2014, compared with the same period one year ago. Last year at this time, seven of the top 25 metro areas had experienced declines in credit card debt.

The rise in credit card debt is a positive step for the U.S. economy, as economists generally believe increased debt levels signal growing consumer confidence. Nationally, credit card debt levels rose from $586.8 billion in the second quarter of 2013 to $604 billion in the most recent quarter, a nearly 3 percent increase.

Another reason for the debt increase is that more card issuers are approving credit cards for people with credit scores below 660, in other words, subprime borrowers, Equifax said.

What’s good for the economy isn’t necessarily good for your financial well-being, particularly considering that a recent survey by Bankrate.com found that nearly 30 percent of Americans have more credit card debt than they have in savings.

Plus, while it’s easy to get into debt, it’s tough to get out, especially if you’ve amassed a large amount. And making the wrong repayment moves, even if your intentions are good, could stall your progress.

Here are seven ways you could be hindering your debt management efforts, along with solutions to help you get out of the hole faster:

1. You’re unrealistic

Do you have a detailed plan of action to hammer away at those balances? Plans that are too lax and exclude deadlines are more likely to fail. Also, if the amount you’ve allocated for credit card debt takes too much money away from your needs or those of your family, failure is nearly inevitable.

To avoid those pitfalls, establish a realistic and detailed debt management plan that lists a reasonable monthly payment amount and dates of completion.

2. You don’t have an emergency fund

What if you have an unexpected expenditure, such as a medical bill or costly auto repair? If you don’t have a stash to draw from, turning to your debt repayment money or taking on more debt are your only solutions.

So it’s essential to reassess your spending plan, make cuts and add that money to your emergency fund to prevent those unexpected expenses from hindering your debt repayment plan.

Need help getting started? Take a look at “9 Ways to Build An Emergency Fund When Money’s Tight.”

3. You make minimum payments

The minimum payment will cover the interest plus a small portion of your balance. While making only the minimum payment will give you more flexibility in your budget, it’ll take you a lot longer to erase your debt — sometimes years — and you’ll pay a lot more interest.

Bank of America gives this example of a $1,500 credit card debt at an 18 percent APR. Notice that upping your payment by a mere $10 can make quite a difference.

Paying just the total minimum due: With an initial minimum payment of $37 per month, it will take 159 months to pay off that $1,500 debt, with a total interest charge during the payback period of $1,760.
Paying $10 more than the total minimum due: With a set monthly payment of $47 (the initial $37 due plus just $10 extra), it’ll take 44 months to pay off your debt, with a total interest charge of $557.59 during the payback period.

So, for a measly $10 more a month, you can pay off that debt nearly 10 years sooner and save $1,202.41 in interest.

4. You rely on payday loans

Only two days remain until payday, but you need a few dollars to hold you over. Without understanding how detrimental it could be to your finances or overall debt management plan, you head to the nearest payday lender. But doing so could cost you hundreds of dollars.

According to the Consumer Financial Protection Bureau:

Fees for storefront payday loans generally range from $10 to $20 per $100 borrowed. For the typical loan of $350, for example, the median $15 fee per $100 would mean that the borrower must come up with more than $400 in just two weeks. A loan outstanding for two weeks with a $15 fee per $100 has an annual percentage rate (APR) of 391 percent.

5. You transfer balances without intending to quickly pay them off

Balance transfer offers are enticing if the new interest rate is significantly lower than what you are currently paying. Lots of offers come with 0 percent interest.

But beware: These offers are typically for a limited period of time and the transfer usually comes with a fee. You must be prepared to pay the fee, usually 3 percent, and pay off the balance before the end of the introductory offer to get the full benefit. Is it worth it? This calculator will help you decide.

6. You keep opening accounts

You’ll never get out of debt if you keep getting new credit cards. Things you want (versus need) should remain in the store if you can’t cover them with cash. The emergency fund should cover unexpected but necessary expenses.

While you’re paying off credit card debt, you should refrain from using your cards if you can.

7. You don’t make timely payments

The fee for late payments on credit cards is usually $25 or $35, and a penalty APR could result if you don’t pay in 60 days. If you anticipate running into a crunch, resort to your emergency fund for relief or give the creditor a call to see if they will work with you.

What tricks have you used to dig yourself out of debt? Let us know in the comments below or on our Facebook page.

Karen Datko contributed to this report.

Correction: This post was updated to accurately report the APR in the Bank of America repayment example.

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