Avoid These 4 Mistakes to Stay Debt-Free

With everything in the news about Americans' skyrocketing debt, it’s easy to see why many people are feeling overwhelmed. But not everyone is in the same boat. Maybe you’ve been able to stick to a budget, work hard and pay off your debt. If so, congratulations!

Now the next phase starts—maintaining the debt-free lifestyle.

Start by making the smart choice—transfer the amount you were putting toward debt to a savings account. A retirement account, emergency fund or education fund are great places to start.

Then, keep a lookout for these pitfalls:

Falling back into debt—With zero balances on your credit cards, it may be tempting to go on a spending spree as a reward for paying off your debt. Or, if you haven’t had access to credit for several years because of past due accounts, it may seem sensible to apply for a credit card to start rebuilding your credit. However, if you don’t employ all those good, debt-free habits into your financial life moving forward, you’ll likely fall back into the actions that created the trouble in the first place.

Closing your credit cards—It may seem like a sensible choice to close your credit card accounts after getting out of debt. After all, you don’t want to be tempted! But, more than likely, at some point down the line, you’ll need that credit history to get a mortgage, buy a car or secure another type of loan. It’s not that it’s impossible to get those things without credit, but having no credit score (or a very low one) means you’ll pay more in interest. And that means a greater chance of hopping back on the train to Debtsville.

Your best bet is to keep the accounts open and use them responsibly. If you don’t like the idea of using them all the time, just put one charge on each card per month. Then pay it off immediately to avoid any interest. It could be a tank of gas, a load of groceries or your water bill. Eventually, this pattern of charging and paying off purchases will result in a higher credit score—which is definitely a proud moment for you!

Not setting financial goals—Just because you’re finally debt-free doesn’t mean you don’t have other financial goals. Consider what you want to accomplish in the future—short-term and long-term. Do you see yourself in a new home? Traveling? Going back to school? Launching your own business? It pays to have something to save for, even if your goals aren’t so grand (a new bike for your son or remodeling your bathroom). Continue that upward swing after successfully paying off your debt. Then make a plan to achieve your new goals.

Not keeping an eye on your credit report—Now that you’ve got a clear debt record, you may think there’s no need to monitor your credit score. Even if you aren’t planning to take out a loan in the near future, it’s still important to keep an eye out for fraud, identity theft and garden-variety mistakes on your credit report. Looking it over annually will help you stay familiar with what should (and shouldn’t) be there. Learn how to identify errors and what to do when you find them.

The bottom line is that, even after you become debt-free, there’s always more to do. Strive for new goals to keep your financial life on track.

Now may be a great time to start a relationship with a financial advisor. They can help you identify your goals and put together a plan to get there.