Top 10 Debt Pitfalls

Feb. 18, 2011 — -- It's easy to fall into debt if you don't knwo how to avoid it. Check out the tips below whic explains the top ten ways to go into debt.

1. Co-sign on a loan with someone else.

Co-signing on a loan for a friend makes a three-way transaction -- you, your friend and the creditor -- that often ends in disaster. Never co-sign a loan unless you are willing and can afford to pay the loan yourself. As a co-signer, you are equally responsible for the loan and should the other party default, you will be pursued like a long-lost lover to make good on the debt. Many times you do not know that the original borrower is late on the payments until you find that your own credit is knocked up. Once the less-than-blessed event of a delinquency appears on your credit, the negative mark cannot be removed for seven years. If you co-sign, expect to pay.

2. Abuse your credit to live beyond your means

If you must buy groceries, gasoline or other essentials using credit because you have no money in your checking account, you need to take immediate action. To avoid debt, spend less than you earn. Unless you do, you will create an ever-increasing debt load that will one day come crashing down on you.

3. Overspend devilishly on luxuries and wants

Shopping as entertainment is dangerous. If you spend on credit and charge items that you cannot afford, such as a house full of furniture when you feel the temptation to redecorate, or a suite at the Bellagio in Las Vegas when you hear the dice calling, you are on a quick trip to overheated and unaffordable debt.

4. Splurge like there's no tomorrow

Unless you believe in divine intervention, you need to know how your monthly income is spent. You must have a plan for spending. Otherwise, you let other people plan your spending. We all like to dine at a great restaurant. But how much can you afford to spend? Not having a plan is like letting the restaurant owner decide your order for you.

5. Skip building a savings "ark"

When it comes to rainy days, Noah found out the hard way. Likewise, without a savings cushion to fall back on, unexpected expenses invariably end up on a credit card. Better to save six to 12 months' of living expenses in an emergency savings account. Then, when the car's air conditioner breaks down, you have a major medical expense or some other event clouds your skies, you have rescue funds available to float you through.

6. Lie to your significant other about your spendingNot only is lying about your spending a bad idea for your relationship, it can wreak havoc on your finances. For example, your significant other may hope to buy a home or take a trip soon. Those plans could be canceled because of your secret debt. Minimize the damage. Fess up before you get exposed.

7. Deliver yourself into indentured student-hoodIt's not smart to take out huge student loans without knowing what career field you are going into or how much you'll earn. Defaulting can end up costing thousands and thousands of dollars. Before you borrow, know how you're going to pay it back. Also, be a sport and don't ask your parents to co-sign. See Sin No. 1.

8. Drive upside down

Texting and driving is bad. Driving a car that's worth less than the amount you owe is a close second. Your car depreciates immediately after you drive it off the lot. Without a big down payment, you will quickly become upside down on the car loan (owe more than the car is worth). So, if you buy a car and can't afford an adequate down payment, or if the monthly payment is a stretch, any change in your financial situation could put you immediately upside down and in default.

9. Pray for better terms

Using credit wisely allows us to buy items that we would have trouble paying for with cash, such as our homes and cars. However, if you can't qualify for a reasonable interest rate for a large item, don't just pray for help. Fix whatever credit problems you have yourself. Then you won't have to put your firstborn up for collateral.

10. Risk your home and retirement

The two most popular assets that people use for collateral to borrow against are their homes and their retirement accounts. Borrowing against these assets can put you in jeopardy. Do so only when necessary, and with a firm plan in place to pay the loan. Try to keep your mortgage loan to 80 percent or less of the home's value. Don't risk your retirement, because it will come whether you are ready for it or not.

Source: FinancialTips101