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10 Debt-Reduction Mistakes People Make

NEW YORK (TheStreet) -- The goal of debt reduction is to make your finances better. However, in their hurry to resolve the issue, many people make some big mistakes that can cost them even more money and leave their finances in even worse shape. So in an effort to guide you toward effective debt reduction, here are 10 huge debt-reduction mistakes you want to be sure to avoid:

1. Ignoring Your Debt

Many people who know they have a debt problem choose to first ignore it in the hope that it will somehow magically disappear. The fact is that the longer you wait to tackle your debt, the more difficult it is going to be. If you currently have debt, now is the time to start reducing it.

2. Getting Taken In by Unsolicited Email Promises

The promises peddled through unsolicited emails offering an easy way out of debt is appealing to a lot of people, which is why they fall for these scams. The problem is that people peddling an easy debt fix know that you are in trouble and play to your weaknesses to scam you out of even more money. Ignore all unsolicited emails and their promises or be ready to find yourself in deeper debt.

3. Consolidating Credit Cards Onto a Home Mortgage

While consolidating unsecured debt through a home refinance or a second mortgage is an option, in most cases it's a bad idea. Until you have identified and fixed the issues that got you into debt in the first place, all a refinancing will do is keep you afloat a bit longer, but at the price of putting your house at risk. You need to solve the issues that got you in debt in the first place. By doing this, you'll likely be able to get out of debt without trading unsecured loans for a secured one.

4. Reducing Costs Without a Plan

A big problem that many people have is that when they realize they are in overwhelming debt, they panic and begin to try and solve the problem as fast as possible without a detailed plan. When you haphazardly try to cut costs and reduce debt, you set yourself up for failure. You need to sit down and come up with a budget and plan on how you are going to reduce the debt in a way that makes sense to ensure your success.

5. Trying to Please Everyone

When debt becomes such a problem that you can't afford to pay all the bills, some people start to pay certain bills and leave others unpaid. Then the next month, they pay the bills that weren't paid the month before and leave the previously paid bills unpaid. While the hope is that all the bills get paid on time, there are definitely some bills that are more important to pay than others. Switching around the bills in the hope that you can please all your creditors will end up displeasing them all and have a terrible effect on your credit. You need to list the bills in order of importance and make sure the most important bills are paid on time.

6. Bypassing Annual Checkups

In order to save money and reduce debt, some people begin to forgo regularly scheduled maintenance and checkups. The problem is that while this may save a bit of money now, it will likely result in much bigger bills down the road. Whether it is your car or your health, make sure to get checkups on a regular basis and at the first signs of trouble, not after it becomes an emergency.

7. Opening New Accounts for Better Rates

One way that some people try to reduce debt is to move balances from high-interest credit cards to lower-interest credit cards. While in theory this is a good move, it again assumes that you have solved the issues that got you in debt in the first place. If these reasons haven't been addressed, opening new accounts, even with the best intentions, will simply lead to more credit cards that are maxed out.

8. Closing Credit Card Accounts

Some people resort to destroying their credit cards or closing their credit card accounts so they cannot spend any more money on them. If you have absolutely no self-control, this could be your best option, but for most people it's a mistake. Destroying the card means that you have to build a cash emergency fund since you can't use the paid-off portion of the credit card as an emergency fund. The result is it will take longer to pay off your debt. If you close the accounts, it can also hurt your credit score by shortening your credit history and by making your debt ratio appear higher. It can also make it more difficult to negotiate with credit card companies since they will be more willing to deal with an active account than one that is closed. While you may want to hide your credit cards so that they're not easy to access, try not to destroy or close the accounts.

9. Not Knowing Your Rights

You have rights when you are in debt and you should know these well. Debt collectors will use every trick in the book, and not all of them are legal. Not knowing your rights can cost you a lot of money and stress. You can find out your credit and debt rights at the Federal Trade Commission Web site.

10. Not Knowing Forgiven Debt Is Taxable

Many people who have part of their debt written off in a debt settlement don't realize that this debt will be reported to the IRS and tax needs to be paid on it. If $600 or more is forgiven, the IRS considers it taxable income (IRS Form 980) in most cases. If you have had a large amount of debt forgiven, it may mean your payment problems simply switched from the credit card companies to Uncle Sam.

While everyone wants to solve their debt problems as quickly as possible, rushing rather than planning usually causes one of the above mistakes. Your best option to avoid these pitfalls and succeed in reducing your debt is to take the time to work out a plan, and the best time to do it is right now.

Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs SavingAdvice.com.

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