8 Mistakes to Avoid After Paying Off Debt


By Raven Stewart / Posted: Jan 31, 2019 / 0 Comments / Posted in All About Debt

8 Mistakes to Avoid After Paying Off Debt
Whether it took you months or years to pay off your debts, there is nothing quite like the feeling of knowing you are finally free.

After putting in so much discipline, that sense of relief can be intoxicating. What will you do with your newfound freedom?

Sadly, for a lot of consumers, the answer is “Go right back into debt.”

Indeed, those who jump right back into debt after climbing out of it do not think that is what is going to happen.

But you should never underestimate the temptation of old habits — especially if you do not have a plan in place.

To make sure you do not fall right back into debt, here are 8 mistakes to avoid after paying off debt.

1. Not Immediately Creating an Emergency Fund

If you do not have an emergency fund, make it your top priority to put one together. Even just setting aside $1,000-$2,000 for the unexpected can save you from needing to take out a loan the next time your car breaks down, or you need to see a doctor.

If you cannot budget this right now, it is time to see what you can do to cut expenses further or increase income. That way you can save.

2. Immediately Taking on New Debts

It is easy to think “Great. Now that I have wiped out all my old debts, I can finally take out some new loans.”

But try not to leap right into this, even if you calculate that you can afford it. Give yourself some time to adjust emotionally and financially to your new reality.

When you do take on debts again, start gradually. Make sure you can handle one debt before you consider taking on two or three. Avoid liabilities that are unnecessary.

3. Closing Credit Card Accounts

When you finally pay off a longstanding balance on a credit card account, you may be thrilled to be shut off the balance, but that doesn’t mean you should close the account.

Dan Rafter (@d_write), a finance writer at CreditCards.com (@CreditCardsCom), explains the problem with closing credit card accounts after paying off the balance. “Closing a card will increase your credit utilization – the amount you have borrowed compared to your credit limits – which is the second most important factor in credit scoring calculations after making on-time payments.”

“Basically,” Rafter continues, “the more of your available credit you use, the more significant the negative impact on your credit score. If you close a credit card, you are instantly lowering the credit available to you. And if you still have debt on other cards, you are now immediately using up more of your available credit, even if you don’t make any future purchases.”

So consider hanging onto your credit card even if you decide not to use it. If you are worried about the temptation, lock it away in a safe, or also cut it up and remove saved credit card data from e-commerce accounts. The account will be open, but you will have made it hard for yourself to use it.

4. Reverting to Your Old Ways With Payments

Now that you have paid off your debts in full, it is okay to go back to making minimum payments again, right?

Financial analyst and MBA holder Pardeep Sharma (Pardeep’s Quora Profile) writes on Quora, “When paying credit card dues, settle in full. Don’t fall for the minimum due balance trap.”

When you go back to paying the minimum on your credit card, you may be surprised by how quickly a balance can build back up. At that point, you can find yourself right back where you started. Try not to let this happen.

5. Not Continuing to Work on Boosting Your Credit Score

Another way in which you might be tempted to rest on your laurels is with regards to your credit score. Now that you have paid off your debts, hopefully, your score is already improving. You may feel like you can relax now and let your score take care of itself.

But if you do not stay proactive about maintaining or raising your score, it may very well start to drop again. So take concrete steps toward protecting and improving your credit score.

6. Swearing off Credit and Loans for Good

After being trapped in debt for an extended period of time, you might not feel like ever taking out another loan again.

It is actually not a bad thing to pay for things with cash when you can, or to at least maintain a “cash mindset” when using credit (i.e., paying off your balance immediately anytime you make a purchase).

But the chances are good that at some point, you will want or need to borrow again. Maybe you will need to buy a house or a car, finance a start-up or go back to school.

So consider continuing to use credit cautiously in order to keep improving your score and your borrowing habits. It may be uncomfortable at first, but eventually, you should regain your financial confidence. And this way, you keep your doors open.

7. Not Setting Clear Financial Goals Moving Forward

For a long time now, your financial goal has been paying off massive credit card debt. Now that you have achieved that, what will you do next?

Finance journalist Geoff Williams (@geoffw) writes about the importance of setting new financial goals in US News & World Report. Describing a couple that finished paying off almost $30,000 of debt, he explains how they nearly lost their way again without a plan for the future.

Williams writes, “But while Desinor and her husband were feeling relieved after eliminating their debt, instead of continuing on the financial path they had been on, they threw their energy into spending money, rather than saving.”

Thankfully, the couple was able to pull things back into perspective and get disciplined again before they went back to into debt. Going forward, they put together a “concrete savings plan” as well as a budget.

8. Slipping up With Your Dedication to Budgeting Tightly

While working toward paying off debt in full, you doubtless kept a close eye on your income and expenses every month. You carefully budgeted every dollar so you could put as much toward paying off debt as possible.

Now is not the time to relax your efforts. It is far too easy to overspend if you are not tracking your budget carefully.

Double down on your accounting efforts, and continue to maintain strict rules for your expenditures. This should ensure that you remain to meet your financial needs without accruing additional debts.

One Journey is Finished After Paying Off Debts, and Another Journey Begins

When you clear large debts, you deserve to celebrate — you have accomplished something really difficult, and you have a clean slate with which to move ahead.

Just make sure that you do continue to carry the good habits you created while paying off your debts forward with you into the future. That way you can keep your finances in the black and continue to work toward achieving your long-term goals.

Experts Cited

Dan Rafter Photo

 

Dan Rafter (@d_write) is a personal finance writer with over 15 years of experience. His articles can be seen in The Washington Post (@washingtonpost), The Motley Fool (@themotleyfool), Chicago Tribune (@chicagotribune), and other major publications.

Pardeep Sharma Photo

Pardeep Sharma (Pardeep’s Quora Profile) is a freelance financial analyst and researcher based in New Delhi. Along with conducting economic research, he also writes and shares financial advice with consumers online.

Geoff Williams Photo

Geoff Williams (@geoffw) has been covering personal finance for US News & World Report since 2013. He has been a journalist since 1993. During that time, he has written for The Cincinnati Post, The Washington Post (@washingtonpost), CNNMoney.com, and other publications.


Works Cited

1 U.S.News “4 Mistakes People Make After Getting Out of Debt” https://money.usnews.com/money/personal-finance/debt/articles/2018-03-06/4-mistakes-people-make-after-getting-out-of-debt

2 Dave Ramsey “4 Quick Ways to Build Your Emergency Fund” https://www.daveramsey.com/blog/4-quick-ways-to-build-your-emergency-fund

3 Bankrate “How to start and build an emergency fund” https://www.bankrate.com/banking/savings/starting-an-emergency-fund/

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