Updated on 10.29.14

Nine Debt-Forming Habits and How to Break Them

Pile of mail and bills

Being disorganized with your bills can make your debt worse. Photo: Brendan C.

The average American household with a credit card carries more than $15,000 in credit card debt, according to debt.org. Add to that $1.2 trillion (and growing) in student loan debt, sprinkle in car loans, a mortgage, personal loans, and medical debt, and we’ve got ourselves an issue.

How did we get here?

The reasons we’re in debt, of course, vary from person to person. But there are some habits and behaviors that can lead to debt or cause existing debt to grow instead of dissipate.

Here are nine habits that might be adding more debt to your life, and suggestions for breaking those habits before they get worse:

1. You Rationalize Your Purchases

One common habit of people in debt is rationalizing the unnecessary purchases they make. And there are even several ways people can rationalize.

First, there’s the “Hey, I deserve this!” line we tell ourselves. We work hard for our money; we deserve a little treat, right? The answer is yes, but only if you can afford it. If you’re going into debt for an item, you shouldn’t be getting it. It’s simple.

There’s also the “I need this” or “I need to do this” theory. I have an important work function, and I need these new shoes to look my best. All my friends are going on this trip, so I need to go. I didn’t have a lot of toys when I was a kid, so I need to give that to my child.

How to break the habit: This habit can be tricky to break since you need to change your perspective. Instead of spending money to reward yourself for working or to feel good, find free or more affordable ways to give yourself that gratification.

Second, don’t make purchases right away. Before you buy something or plan a trip, really reflect on your current financial situation. Is this really a need? Or is it actually a want? Can I wait to buy this until I have the money for it instead of using credit?

2. You Assume You’ll Make More Money Later On

We assume we’ll get a better job, earn a promotion, or somehow be earning more money later on. Why do without now when we can simply pay off our debt later when we have more money?

A prime example of this habit is with student loan debt: The average student graduates with more than $40,000 in debt.

The unfortunate truth is, that great pay increase isn’t guaranteed, and may never come. Then you’re dealing with massive debt.

But even if it does come, you’ve been paying interest on these items. So while you may be charging a $20 dinner, a $100 jacket, or a $1,500 vacation, those items are actually costing you much more with interest.

How to break the habit: Don’t make assumptions. You can only work with the true reality of what you have in front of you. If you want to buy something, save for it until you can afford it. And think about it: Even if you do end up earning more money later, do you really want to have to spend it paying off old debts and racked-up interest?

3. You’re Disorganized With Your Bills

It’s easy to get disorganized with your bills. After all, there are a lot of them to keep track of, and they come at all different times of the month. You might get a portion of your statements online and a few in the mail. Some bills may get automatically deducted from your account, while others you pay yourself.

Unfortunately, this inconsistency can create debt for a number of reasons. If you’re not monitoring your statements or keeping track of your bills, you may be spending more than you can afford. Plus, you may never know if there’s a mistake on your statement and you’ve been charged for something you didn’t purchase.

Also, late payments can cause your debt to increase with late fees, or, in some cases, cause your interest rate to go up.

How to break the habit: Find a system that helps you get organized and stay consistent with your bills. Set reminders on your calendar when bills are due each month, or set aside an hour each week to check your statements and schedule or send payments.

4. You’re in Denial and/or Not Dealing With Your Debt

An estimated 35% of Americans have debt in collections, according to a study by the Urban Institute. One obvious reason is that some people are simply unable to pay their debt. But there are also those who choose to ignore it.

Being in debt can feel like you’re drowning, leaving you completely overwhelmed. You may feel like you don’t even know where to begin; when you think about it, you grow anxious. It can be tempting to simply ignore the debt.

That’s a bad decision. The debt will do nothing but increase with interest. Plus, you’re going to cause harm to your credit report, which can make it difficult to get a mortgage, qualify for a loan, or even rent an apartment.

How to break the habit: While it may be hard at first, face your debt head on, since that’s the only way you’re going to deal with it. Understand what you owe, what the interest is, and form a plan of attack. If you’re unable to make payments, call your credit card companies or lenders to see what type of plan they can work out with you. If student loans are an issue, you may be able to explore an income-based repayment option or an economic hardship deferment that could temporarily help your situation.

5. You Don’t Budget or Keep Track of Your Money

A recent poll showed that only 32 percent of people actually have a budget. If you’re not budgeting, you may not realize how much you’re spending every month, or what you’re spending it on. Since we use credit cards for so many purchases, it can be quite easy to spend more than we earn, which is going to lead to debt.

How to break the habit: Create a budget by figuring out your income, then subtracting your set bills, such as rent, utilities, cell phone plan, and whatever else you spend every month. Now you can figure out what you have left to spend on food, entertainment, transportation, and other more flexible expenses.

The trick is to make it balance. You may need to cut your bills (e.g., cancel cable, turn down the thermostat, downgrade your cell phone plan), cut expenses (stick to sales and coupons at the grocery store, carpool to work, find free things to do for entertainment), or earn more money (take on extra shifts at work, get a part-time job, sell unwanted items) to strike a balance between what you earn and what you spend.

6. You’re an Impulse Spender

You see something, you want it, you buy it. Sound familiar? With the swipe of a credit card, a click of a mouse, and even now a tap of the phone, we get what we want. If you’re an impulse shopper, this could be a habit that is causing you debt.

How to break the habit: Create a new “one-week” rule. Take a photo of something you want to buy, and take time to think about whether or not it’s a good decision. Consider opting out of e-mails from your favorite stores and deal sites that could create temptation to buy. When grocery shopping, try planning your meals in advance based off what’s on sale and make a list. Stick to the list to avoid those impulse buys.

7. You’re Using Credit Cards the Wrong Way

Credit cards aren’t the reason you’re in debt. It’s how you’re using them. In reality, if used correctly, credit cards can be beneficial. If you’re able to pay off the balance each month and not accrue interest, they can help you build a solid credit score and improve your credit report. This can help you get a better rate on a mortgage or student loan in the future.

Plus, using credit cards in a smart way can earn you cash back or other types of rewards. And many cards offer fraud protection and other benefits, so they’re a safe and sensible way to spend when making big purchases you’d be making anyway.

However, a debt causing habit is using credit cards the wrong way. Almost a third of Americans report having more credit card debt than savings. If you’re using credit cards to fund a lifestyle you can’t afford, that is a bad habit.

How to break the habit: Reevaluate your relationship with credit cards. Tally up what you’re actually paying in interest every month, and use it as a motive to stop spending before it gets any farther out of hand. If you’re in credit card debt, stop charging and start working on paying that balance down.

8. You Don’t Think ‘the Worst’ Is Going to Happen

More than 28% of Americans have no money saved for emergencies, according to Bankrate.com. If something unexpected occurs and you don’t have an emergency fund or savings, you’ll most likely turn to credit cards for help.

No one wants to think something bad is going to happen, but the truth is, things go wrong. From a car breakdown to a job loss, bad stuff happens — stuff that would cause a lot less havoc in our lives if we had money set aside to help. If you’re turning to credit cards as a security blanket, interest charges will cause that debt to rise quickly.

The same is true for health issues. If you don’t have health insurance, you’re putting yourself at risk for the burden of medical debt, which is the single biggest cause of personal bankruptcies in America. Nearly half of low- and middle-income households have medical expenses on credit card debt, at an average amount of $1,678.

How to break the habit: Start saving a portion of your earnings every month for an emergency fund. Even if you’re only able to save a little each month, it’s better than nothing, and it will add up. Find ways to make extra money or cut expenses to add to the fund. Anything you have saved in an emergency fund is that much less debt you’ll need to take on should something happen.

If you don’t have health insurance, visit Healthcare.gov to explore affordable plans.

9. You’re Trying to Keep Up With Others

Our culture generally associates success and happiness with material things — like a big house and an abundance of money. If you don’t have these things, you may feel like you aren’t successful.

Unfortunately, people often feel pressure to “keep up with Joneses” and purchase items they can’t afford just to impress — or simply feel like they’re not being surpassed by — those around them. According to a Federal Reserve Board study, an astounding 43% of families are spending more than they earn in America.

Buying things to maintain a certain image or lifestyle is unlikely to bring you fulfillment or happiness. In fact, if you can’t afford it, it’s more likely to cause you stress and anxiety as you fall deeper and deeper into debt.

You may not even be trying to impress anyone — maybe you simply don’t want to miss out. If you have friends that earn more money than you do, you may be tempted to go to the same restaurants or take the same pricey trips as they do. It doesn’t bother you, or them, that you make less money than they do — but you want to do what they do, because you enjoy their company.

How to break the habit: If you are in a social circle where people are judging you on your income and the price of items you are buying, it may be time to break away and find friends who aren’t concerned with your money. Understand that it’s not what you have, but it’s what you do and how you live your life that makes you a successful person.

If your friends are earning more money than you, and you feel pressure to spend what they’re spending, be honest. Let them know you can’t keep up with expensive dinners and pricey nights out. Suggest more affordable things you can do together instead.

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