10 Bad Habits That Lead to Debt Disaster

Bad Habit No. 2: Not checking credit reports -- you can'tchange them anywayWrong. If you have credit cards, pull your credit report atleast once a year and check it for errors. Purging your record ofinaccuracies can be crucial for getting better interest rates, landingthe job you desire and stopping an identity thief from ruining yourcredit rating. Your credit report also affects your credit score, whichdetermines how high your interest rates will be on future loans.Dispute anything you think should not be there. The Fair CreditReporting Act allows for the correction or deletion of inaccurate,outdated or unverifiable information, provided that a reinvestigationinto the disputed data sides in your favor. Unfortunately, negative buttruthful data must stay put. A Chapter 7 bankruptcy filing, forinstance, will remain on your credit report for 10 years, a Chapter 13for seven years.Try this: You canrequest one free copy from each of the bigthree credit reporting bureaus, Experian, TransUnion and Equifax, everyyear. Why bother? Errors on your report, such as apayment marked late that came in on time, could raise your interestrates, lower your credit score and affect your ability to obtain creditin the future.If you do find a mistake, send a correction letter to each of thecredit bureaus that show the error. Experian allows you to dispute errors online, as do TransUnion and Equifax.

Don't bother with so-called credit-repairclinics that aim to charge you hundreds or thousands to fix your creditrecord. "Anything you can legally do to repair it you can legally dofor free," says Cunningham. Of course, if you're not willing ordedicated enough to write those letters and follow up with thecredit-reporting agencies, paying someone else to do it for you may notbe such a bad idea. Better to have someone dispute the errors ratherthan no one. But be extremely careful in selecting such an organization-- try to get referrals and seek out others who have been satisfiedwith the service. Bad Habit No. 3: Failing to alertcreditors about a financial hardshipYouheard the rumor: Layoffs are coming to a department near you next week.Don't wait until it happens to worry abouthow to pay your bills. Do some damage control right away. Try this: "The besttime to negotiate is before the problem spirals downhill," saysCunningham. Call the credit card company and explain the problem you'reabout to have. Ask if they could temporarily lower your interest rateor extend your payment deadline. Some issuers have in-house helpprograms that provide such short-term services to customers. Bad HabitNo. 4: Thinking of "budget" as a dirty word.

The word may call to mindtedious self-trickery meant for those with low incomes, but everyonecould benefit from deciding on certain amounts for spending, andsticking to the amount no matter what. It also makes sense to budgetfor known future expenses, such as quarterly insurance premiums,college textbooks and rent. Not saving up in advance means you'll haveto charge expenses or cut into funds set aside for necessities. Budgetthese fixed costs while you can handle small financial pinches.Try this: To find outwhat's draining your finances, keep track of where your money goes fora month. Use a spreadsheet, financial software or a pen and paper andcategorize your expenses. Doing this will reveal whether you'respending too much on expenses you could trim, such as restaurantoutings and gas. Then you can consider cooking at home more often orconsolidating driving trips. Cut back as necessary without cutting outexpenses important to you. Cunningham suggests that if you enjoywatching TV, but don't tune in to a majority of the 300-plus channelsyou have, consider cutting back on your cable package instead ofcutting out TV altogether.For a detailed household spending plan,try our home budget work sheet. Or, gethelp creating a budget with our budget calculator. Plan for futurecosts by figuring out the total amount you'll owe and divide by thenumber of months you have until that day, says Cunningham. If you havemoney due next month, divide by the number of weeks you have and savethat amount every week.

Bad Habit No. 5: Using retailstore credit cards to make use of discounts Chancesare, that card carries a high interest rate you'll be forced to dealwith if you don't pay off your balance each month. Try this: If you mustcharge your purchase, use your general-purpose credit card, saysCunningham. If you can't pay off the balance, at least you'll pay alower interest rate. Limit the total number of credit cards you have tojust two, if you can: one you can pay off each month and one with a lowinterest rate for those large purchases you'll pay back over time.Bad HabitNo. 6: Procrastinating on creating an emergency fundLearn to save for financialemergencies. Even if you feel robust and invincible, a single emergencyroom trip or car accident could force you to put large balances oncredit cards, causing interest to accrue and more debt to pile up."That rainy day will happen," Cunningham says. "It's not a matter ofif, it's a matter of when." If your tire goes flat and you can't payupfront for the replacement, for instance, you're stuck with chargingit or reducing funds earmarked for necessities. That's where theemergency fund fits in.Try this: Maintain anemergency fund of at least three to six months' worth of livingexpenses, and keep your insurance policies up to date. Work toward thatgoal by socking away 10 percent of your take-home pay each month in aliquid savings account, says Cunningham. If you receive a raise orbonus, add that money to savings. Since you're not used to the extracash flow, you won't miss it.

Bad HabitNo. 7: Paying bills in no particular orderWhile the order may not matterif you can pay all the balances, it will matter if you fall short onemonth. Say you pay off the balances on your credit cards first, thenfind you can't make the minimum on your house payment or monthly rent.You've put the roof over your head at risk.Trythis: "Pay forliving expenses first," says Cunningham. After the house or rentpayment, necessities such as utilities, groceries and medical careshould top the priority list. Next comes the car payment -- you want toavoid repossession, obviously. On down the line, secured loans andco-signed debts follow in importance, then unsecured loans and creditcards. "Ideally, everyone can get paid, but if a choice has to be made,paying in this order will do a better job of keeping the home lifestable." Sincebills often aren't due in this order, you'll need to work out a paymentschedule and set aside money from each paycheck. BadHabit No. 8: Charging purchases instead of paying in cash or with adebit cardHow many times have you charged services ormerchandise when you had the money to pay with cash or debit?Insignificant purchases of $20 and $30 made several times over canquickly add up, particularly if you already carry a balance. Balancesyou can't pay off each month mean paying interest charges and,subsequently, more money for items you could have bought outright,interest-free.

Try this: Make a habitof paying for purchases under $50 with cash, debit or check. Knowingthat the money has to clear the bank sooner could help curb yourspending habits. Just be sure to check your balance regularly to ensurethat you have enough funds.BadHabit No. 9: Making credit payments late.After all, it's only a $39 late fee. Besides wasting money you could'veput toward the balance, a payment that arrives at least 30 days pastdue can throw your account into default and triple your interest rate.Plus, other creditors may start charging you a default interest rate aswell, thanks to a universal default clause buried inyour contract. "Creditors are constantly reviewing your creditactivity, and if they see you falling behind with one creditor, even ifyou have a perfect payment history with them, they can raise yourinterest rate," Cunningham says.Try this: On acalendar, mark upcoming paydays and payments that should come out ofthat paycheck, she says. If you're mailing payments, send them seven to10 business days in advance. Better yet, sign up for online bill pay.Just check that the address on file and the address on the statementmatch, or the payment might not arrive on time. If you're still late,call the creditor, explain the situation and ask them to forgive thelate fee. Check your credit report and be sure the information shows upcorrectly.

BadHabit No. 10: Making the minimum payment only.Paying the minimum is better than paying nothing, but it doesn't domuch to pay off most balances and forces you to keep paying interest.By paying interest on interest, you lose any savings from buying adress on sale, Cunningham says.Try this: If you canafford to pay more or in full, go ahead and pay as much of the balanceas you can. You never know when you're going to have a tough month. Payin full every month and you can avoid interest charges altogether. Or, if paying more than theminimum proves difficult, consider working an extra part-time job ordecreasing your expenses -- or both, says Cunningham. Put all of yourextra earnings toward the debt. Use our minimum payment calculator to seehow much you're saving in interest charges.Bankrate.comis the Web's leading aggregator of information on financial productsincluding mortgages, credit cards, new and used automobile loans, moneymarket accounts, certificates of deposit, checking and ATM fees, homeequity loans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.