Crushing debt is a big reason why General Motors (Stock Quote: GM) is teetering on the brink of bankruptcy. Companies as diverse as MGM Grand (Stock Quote: MGM) and Sirius XM (Stock Quote: SIRI) are all creaking under huge debt loads. The flow of credit may grease the wheels of the American economy, as these examples demonstrate, debt can be a burden. So, with that in mind, it's important to avoid bad borrowing habits in your own finances.
Here are five of the worst bad-debt habits and ways that you can work to avoid them:
1.) Charging it: Credit cards are useful tools that can help you track your spending, but the abuse of plastic can lead to financial ruin. "A major mistake is to charge more than you can pay for when your bill comes due," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "If you buy something that's on sale, but have to pay it off over several months, your interest payments cancel out all of the savings."
Fix it: Write your credit card purchases in your checkbook with a different colored pen. That way the money you have in your account factors in credit card charges as well as checking transactions.
2.) Skipping a payment: When it comes to your credit card debt, you should never make a late payment, skip a payment or pay less than the minimum, explains Cunningham. "That's a red flag to the bank and your creditors," she says. "And it can dramatically lower your credit score." No only that, but you’ll get charged a hefty fee.
Fix it: If you’re strapped for cash and can’t afford your credit card payment, for now, make only the minimum payment required and build up your cash reserves. The benefits of establishing an emergency fund outweigh the long-term costs of paying only the minimum payment. But be careful, if you only pay the minimum for too long, you’ll see your interest start to mount.
3.) Using too much credit: Regularly using more than a third of your available credit could lead to a drop in your credit score: lenders will see you as being cash-strapped and therefore a higher credit risk.
Fix it: Pay down your balances below the 30% threshold and reduce your credit card use. Consider switching to using a debit card if you like the convenience of plastic.
4.) Applying for lots of new credit: Applying for too much credit at one time can signal lenders that you are under financial duress.
Fix it: If you need new credit, keep your applications several months apart rather than clumped together.
5.) Buying now and paying later: Retail offers that involve zero payments and zero interest for the first year seem great, but they can be risky. "In most cases, being late on a single payment can result in interest charges stretching back to the day you purchased the item," says Cunningham. "These programs also open up a new line of credit that is immediately maxed out, which can negatively affect your credit score."
Solution: Try to plan out your big purchases in advance so you can save up