10 bad habits that lead to debt disaster

By Leslie Hunt, Bankrate.com

Learn from these mistakes and try these tips to start paying off your debt.

Bad Habit No. 1: Misusing balance transfers.

Transferring balances on high-interest cards to lower-rate cards can be an effective technique, but it's easy to make it a good idea gone wrong.

Transfer a balance onto a card with a low introductory rate and you can potentially save money on interest if you refrain from charging on it and focus on paying off the balance before that introductory rate expires.

But most people continue to charge on the new card and wind up with more debt once the teaser rate expires.

Try this:

Put the money you save toward paying off your balances. Pay for new purchases with cash or a debit card.

Bad Habit No. 2: Not checking credit reports - you can't change them anyway.

Wrong. If you have credit cards, pull your credit report at least once a year and check it for errors. Purging your record of inaccuracies can be crucial for getting better interest rates, landing the job you desire and stopping an identity thief from ruining your credit rating.

Your credit report also affects your credit score, which determines how high your interest rates will be on future loans. Dispute anything you think should not be there. The Fair Credit Reporting Act allows for the correction or deletion of inaccurate, outdated or unverifiable information, provided that a reinvestigation into the disputed data sides in your favor.

Unfortunately, negative but truthful data must stay put. A Chapter 7 bankruptcy filing, for instance, will remain on your credit report for 10 years, a Chapter 13 for seven years.

Try this:

You can request one free copy from each of the big three credit reporting bureaus, Experian, TransUnion and Equifax, every year. Why bother? Errors on your report, such as a payment marked late that came in on time, could raise your interest rates, lower your credit score and affect your ability to obtain credit in the future.

If you do find a mistake, send a correction letter to each of the credit bureaus that show the error. All three credit reporting bureaus allow you to dispute errors online.

Don't bother with so-called credit-repair clinics that aim to charge you hundreds or thousands to fix your credit record. Anything you can legally do to repair it you can legally do for free.

Bad Habit No. 3: Failing to alert creditors about a financial hardship.

Try this:

The best time to negotiate is before the problem spirals downhill. Call the credit card company and explain the problem you're about to have. Ask if they could temporarily lower your interest rate or extend your payment deadline.

Bad Habit No. 4: Thinking of 'budget' as a dirty word

Try this:

To find out what's draining your finances, keep track of where your money goes for a month. Use a spreadsheet, financial software or a pen and paper and categorize your expenses.

Doing this will reveal whether you're spending too much on expenses you could trim, such as restaurant outings and gas. Then you can consider cooking at home more often or consolidating driving trips.

Cut back as necessary without cutting out expenses important to you.

Bad Habit No. 5: Using retail store credit cards to make use of discounts

The retail store card often carries a high interest rate you'll be forced to deal with if you don't pay off your balance each month.

Try this:

If you must charge your purchase, use your general-purpose credit card.

Limit the total number of credit cards you have to just two, if you can: one you can pay off each month and one with a low interest rate for those large purchases you'll pay back over time.

Bad Habit No. 6: Procrastinating on creating an emergency fund

That rainy day will happen. It's not a matter of if, it's a matter of when.

Try this:

Start the emergency fund by a small amount - let's say $1000.

Maintain an emergency fund of at least three to six months' worth of living expenses, and keep your insurance policies up to date.

Work toward that goal by socking away 10% of your take-home pay each month in a liquid savings account. If you receive a raise or bonus, add that money to savings. Since you're not used to the extra cash flow, you won't miss it.

Bad Habit No. 7: Paying bills in no particular order

While the order may not matter if you can pay all the balances, it will matter if you fall short one month.

Try this:

Pay for living expenses first.

After the house or rent payment, necessities such as utilities, groceries and medical care should top the priority list. Next comes the car payment -- you want to avoid repossession, obviously. On down the line, secured loans and co-signed debts follow in importance, then unsecured loans and credit cards.

Bad Habit No. 8: Charging purchases instead of paying in cash or with a debit card

Try this:

Make a habit of paying for purchases under $50 with cash, debit or check.

Knowing that the money has to clear the bank sooner could help curb your spending habits. Just be sure to check your balance regularly to ensure that you have enough funds.

Bad Habit No. 9: Making credit payments late

After all, it's only a $39 late fee. Besides wasting money you could've put toward the balance, a payment that arrives at least 30 days past due can throw your account into default and triple your interest rate. Plus, other creditors may start charging you a default interest rate as well, thanks to a universal default clause buried in your contract.

Creditors are constantly reviewing your credit activity, and if they see you falling behind with one creditor, even if you have a perfect payment history with them, they can raise your interest rate.

Try this:

On a calendar, mark upcoming paydays and payments that should come out of that paycheck. If you're mailing payments, send them seven to 10 business days in advance.

Better yet, sign up for online bill pay. Just check that the address on file and the address on the statement match, or the payment might not arrive on time.

If you're still late, call the creditor, explain the situation and ask them to forgive the late fee. Check your credit report and be sure the information shows up correctly.

Bad Habit No. 10: Making the minimum payment only

Paying the minimum is better than paying nothing, but it doesn't do much to pay off most balances and forces you to keep paying interest.

Try this:

If you can afford to pay more or in full, go ahead and pay as much of the balance as you can. You never know when you're going to have a tough month. Pay in full every month and you can avoid interest charges altogether.

Or, if paying more than the minimum proves difficult, consider working an extra part-time job or decreasing your expenses - or both.