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How to Avoid New Debt When You’re Already Digging Out

Something I learned far too late into my twenties is that when you’re trying to get out of debt, finding the money to pay down debts is only half the battle. Sometimes, it’s even harder to avoid going into new debt than it is to pay down debts you already have. This year, for the first time in my life, it seems that I’m finally able to pay cash for everything. I have an emergency fund, and I’m confident that even if my car broke down tomorrow, I could fix it without tacking the bill onto my credit card balance. If you’re working your way out of debt, I’ve compiled some tips to help you with this half of the battle: Avoiding going into any new debt!

Set Up a Baby Emergency Fund

Most people working to get out of debt don’t have healthy savings accounts because they’re funneling any extra cash towards debts, as they should be. Trouble is, when an unexpected expense pops up, there’s no additional money lying around to pay for it, so you end up using credit cards again. As you can imagine, if you’re paying $500 a month towards your debt but charge $1,000 in new debt every few months to cover life’s unexpected expenses, the pace at which you repay your debt is going to slow way down.

You can combat this by creating a “baby” emergency fund that you can use for true emergencies instead of credit. Save this money as soon as possible, even if it means only making minimum debt payments for a few months. Dave Ramsey recommends that everybody save $1,000 first regardless of how much debt you have, and I agree. You may even decide that $2,000 or $3,000 feels more comfortable, depending on what unexpected expenses you might face.

Leave a 20% Cushion In Your Budget

Obviously you want to pay down your debt as fast as you can. Experts tell you to put any additional money you have every month towards a debt snowball. That’s smart, but if you literally throw every spare penny at your debt, you may still come up short of cash at the end of the month leaving you to lean on credit cards again to make up the difference.

You need a monthly budget to figure out how much extra you can pay towards your debt every month, but budgets aren’t perfect. Few people spend the exact same thing on groceries, gas, and other expenses every month. Your budget is going to fluctuate by as much as 20% every month. When you decide how much additional cash to put into your debt pay-down-plan, leave yourself that 20% cushion. If you don’t spend it, you can make an additional debt payment.

Consolidate or Automate Your Debt

Credit card debt is designed to be difficult to escape because of its revolving nature—as soon as you pay down $1,000 on your credit card, you have $1,000 of credit available again. For many, the temptation to use it is too great. The second problem is that the minimum payments are so low and you have the option of just paying that amount whenever you want. By contrast, fixed loans (like mortgages and auto loans) are much more manageable. You know exactly when you’ll pay off the loan, you have to make the same sizable payment every month, and you can’t tap the loan for additional funds after it’s dispersed.

Personal loans operate in this way and are a great way to simplify debt repayment by consolidating credit card balances into a fixed monthly payment. Of course, it can be hard to get a debt consolidation loan if you’re already indebted or you have poor credit. If your credit is still good, you can explore personal loan options at your local bank or credit union or through social lending networks like Pertuity Direct and LendingClub.

If you do consolidate debt, you must resist the temptation to use the credit cards you just paid off with the loan. Which brings us to my last tip:

Cut Up the Credit Cards (Really)

It’s one thing to turn to your credit cards for unexpected expenses because you don’t have any other way to pay; it’s another problem when you reach for the credit cards for impulse purchases even though you’re working on paying down debt. That’s why people freeze their credit cards, put them in the blender, or just cancel them altogether.

Only you can decide whether you need to take the step of removing credit cards from your life altogether to avoid using them. If you think you might slip up, even if the cards are locked away, get rid of them altogether. Think twice about canceling unused credit card accounts (even if you’ve trashed the card) since canceling open credit cards will impact your long-term credit score. That said, if you think you’d find a way to use the accounts if they are still open, better to cancel them, get out of debt, and rebuild credit a bit more slowly than to hinder your quest for debt freedom.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.