5 Bad Financial Habits That Could Lead To Bankruptcy

5 Bad Financial Habits That Could Lead To Bankruptcy

Chloe Seaman
April 4, 2018

Carrying debt such as loans, medical bills, and credit card balances can have lasting negative effects on your financial health, especially when your inability to pay it off leads you to bankruptcy.

It’s best to practice smart money management so you don’t land yourself in financial trouble. Here are a few common financial habits that increase long-term debt, and should be avoided whenever possible:

1. Paying Only The Minimum On Credit Cards

You’ve probably noticed that the minimum payment on your credit card is significantly lower than your total balance. If you only pay that minimum, the interest you accrue on the remaining balance will only set you further back on your debt. To avoid interest accrual once your card is paid off, only charge what you know you can fully pay off in one or two statement cycles. Until then, pay as much as you can comfortably afford.

2. Taking Out A Payday Loan

Payday loans are short-term, small-balance loans that give you a few hundred dollars today, with the expectation that you’ll pay it back with your next paycheck. This might seem like a great idea when you’re strapped for cash, but read the fine print: Payday loans come with exorbitant interest rates (Credit.com says the average APR on a payday loan is 400 percent), and when you combine that with financing fees, you could end up paying back much, much more than your original loan amount.

3. Making Impulse Purchases

Convincing yourself you “need” that new kitchen gadget or on-sale designer item is the first step down a dangerous path of overspending. According to Money Crashers, impulse shoppers often use their credit card for these unplanned and often unbudgeted purchases, which could spell trouble if you don’t have the funds to pay it off right away.

4. Failing To Set Aside Savings

CNBC recently reported that less than 40 percent of Americans could cover a $1,000 emergency using their current savings. If you’re in the other camp, you’d be wise to start building your savings right now. Setting aside just $25 or $50 per paycheck (or more, if you can afford it) will build up over time, and you’ll be less likely to take out a loan or charge your credit card for an unexpected expense.

5. Living Beyond Your Means

When you see friends going out to expensive dinners, buying new clothes, and taking luxurious vacations, you may feel compelled to “keep up with the Joneses” and do those things, too – even if you can’t afford them. This type of spending leads to a cycle of charging basic necessities, transferring balances, and borrowing money, which will keep you trapped in debt.

“If you continue, you’re going to find yourself declaring bankruptcy,” financial advisor Andy Byron said in an interview with Bankrate.

Creating (And Sticking To) A Budget

With a realistic and properly managed budget, you can stay on top of your finances and avoid the above-named habits that could send you spiraling toward bankruptcy.

Financial experts recommend taking a good, hard look at your income versus your fixed costs. Once you figure out what you have left over from your take-home pay, you can divide that up into a timescale-based “allowance” for yourself, whether that’s daily, weekly, or monthly. Commit to not spending more than that allowance amount during your chosen timescale, and you’ll be able to stay within your budget.

You can find additional budgeting advice in our blog post, Budget Tactics Anyone Can Follow.

Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.