2 Money Mistakes Keeping You in a Debt-Cycle

Did you know that the average person owes over $90,500 in debts? That is because debt is a like a viral financial mindset.

The average person mired in debt can only create money by generating more debt. This is a debt-cycle mindset created and perpetuated by desperation and complacency.

I am not judging you. I have been broke, homeless, and it took me a decade to learn I had fostered a debt-cycle mindset most of my life.

Debt misery is usually a self-initiated disaster caused by mistaken, preconceived concepts about personal finance.

Here are two money mistakes you may be committing yourself that is keeping you in a debt-cycle.

Payday Loan Debt Traps

Payday loans are not designed for your convenience or ease of application purposes.

Payday loans are designed for the optimum convenience of the lender to collect their debt at your extra financial expense.

Essentially, payday loans are unsecured, advance loans against your future paychecks until the debt is repaid.

You fill out an application online. If you have bad credit, your interest rates can increase dramatically.

As long as you have a bank account and been employed for over a year, it isn’t hard to get approved for a payday loan.

The problem for you begins during the application process. To qualify for the payday loan, you must authorize the payday lender to have direct and overriding access to your bank account.

Your payday loan will be paid back on a predetermined weekly or bi-weekly withdrawal period based on your future salary deposits.

If you miss a payment, you will be hit with massive late penalty fees.

The average interest rate on a payday loan is about 400%. It can be as high as 1,000% in some states.

Payday loans are also known as predatory loans. They are primarily used by financially desperate people. In fact, 1-in-4 people will use payday loans at least 9 times.

However, you will end up paying more money in late fees and interest payments relative to what you initially borrowed.

And you will probably end up in more debt than before you first applied.

You are better off in debt, creating a budget, and negotiating with your creditors than taking a payday loan. They are a debt trap.

Closing Credit Card Accounts After Paying Them Off

This may seem like the most responsible thing a person in debt can do. After you pay off a credit card, you should just cancel the account, right?

Isn’t it a good thing to limit sources of temptation if you can’t manage your debt?

Canceling your credit card accounts can be the most destructive thing you can do to your credit history.

A credit history is an automated calculation and averaging of your creditworthiness based on your credit charging activity and history.

Think about your first credit card. If you opened it 12 years ago, then 12 years of your credit history is based on charging activity throughout that period.

If you cancel 2 or 3 credit card accounts, then years of credit activity will digitally evaporate from your credit history.

Your credit score will drop temporarily and then be re-averaged automatically.

Your credit history will look sparse to non-existent. You will look like an extreme credit risk if you try to apply for new credit in the future.

After paying off a credit card debt, keep the account open and charge to it occasionally to maintain your credit average.

Keep a Budget and Save More Than You Owe

It’s hard to get through life without incurring debt. What matters is handling debt responsibly.

Keep detailed weekly and monthly budgets. Track your purchases. Critically analyze how you spend money.

Save as much as possible. Saving $25 is better than adding another $25 to your debt load.

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Posted in: Credit and Debt, Debt, Minimalism and Frugality, Money, Personal Finance, Saving Money, saving money

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