10 Debt-Reduction Mistakes

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.