4 Debt Traps And How To Avoid Them

One of the best ways to keep out of debt is to be mindful of the many pitfalls that are waiting to swallow you up, and how best to avoid them. The problem is, some of these debt traps don’t look so deadly until you consider the consequences.

Over at Kiplinger.com, they’ve put together a round-up of common but dangerous debt traps, along with some advice on how to side-step them.

Here are the highlights:

1. Binging on Student Loans:
Before you realize that your liberal arts degree will get you a job you don’t want and for less money that you’d expected, it’s easy to over-estimate one’s ability to repay student loans. So while you’re able to live well as an undergrad, you could find yourself swamped in debt soon after graduating.

Thus, before you go signing your life away on student loans, think realistically about your post-college earning potential. This should also factor into your choice of a school: Is it worth spending $150,000 at a fancy school when you may end up with the same earning potential as a graduate of a less-expensive institution?

2. Starting a Marriage in Debt:
Chances are you know more than your fair share of divorced people. Ask yourself how much of that marital tension in those former relationships was money-related. While we can’t advise that you avoid marrying someone because of a high credit card balance, it is advisable to avoid adding further debt by going hogwild on your nuptials.

Kiplinger says that the average wedding in the U.S. costs $18,859… but yours doesn’t have to: “Hold the ceremony in a friend’s backyard, trim the guest list, skip the bar or send out wedding invitations online. You can also cut corners by buying a modest engagement ring and putting off the exotic honeymoon. A few years down the road, when you’re on better financial footing, you can splurge on both.”

Rather than think about the lavish wedding you didn’t have, it’s better to think about the house down payment — or college fund, or retirement savings — you do have because you opted to have a modest marriage ceremony.

3. Co-Signing a Loan:
We’ve covered this one numerous times in the past, but it always merits repeating: Unless you are willing and able to repay another person’s debt, you should avoid co-signing a loan at all costs. Maybe your brother will be angry that you wouldn’t help him buy that speedboat, but you won’t find your finances sinking when he fails to keep up with payments. As for advice on staying away from this trap, Kiplinger writes, “The only sure way to dodge this debt trap is to just say no when asked to co-sign a loan.”

4. Over-Improving Your Home:
Just because you remodel your home doesn’t mean that you’re going to reap the full benefit of the remodeling when you sell the house. In fact, it could be very tempting to go too far and make changes that might actually hurt the value of your home down the line.

“Research the resale value of various home improvements before you commit to a contractor to dodge this debt trap,” writes Kiplinger. “Determine the resale value of home improvements in your area by consulting with local sales agents.”

And be aware that very personal or idiosyncratic remodeling jobs could turn potential buyers away and lower the price of your listing.

In terms of financing the remodeling, it’s best to seek out a low-interest loan or home equity line of credit, but you should not go plundering your retirement savings just to slap some new granite counter tops the kitchen. “If your savings aren’t sufficient and a low-rate loan isn’t available, set aside improvement plans until your resources catch up with your inner designer,” suggests Kiplinger.

7 Costly Debt Traps and How to Avoid Them [Kiplinger]