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The 5 Dumbest Financial Moves You Can Make

Investopedia logoInvestopedia 10-11-2015 Justin Walton

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While everyone makes mistakes, some of your financial decisions and habits can have a significant impact on your future, and possibly the future of your children. When it comes to money, ignorance is not bliss. Taking your head out of the sand and making changes now not only improves your quality of life down the road but gives you peace of mind. It is never too late to take steps to improve your financial standing, and by avoiding these common pitfalls, doing so is much easier.

1. Overusing High Interest Rate Loans

While some states have outlawed high interest payday loans, unscrupulous lenders have moved their operations online to skirt the laws and changed the names and terms of the products. These relatively small, high-cost, short-term loans are made using borrower’s postdated checks or bank account access as collateral, and are designed to trap borrowers in debt. Almost identical to payday loans, auto title loans use your car as the collateral; if you default on the loan you lose your car.

It is common for cash-advance loans to have annual percentage rates (APRs) of 400% or higher. These loans should be used as an absolute last resort and never to pay down debt with lower interest rates.

2. Maxing Out Credit Cards for Leisure

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Credit cards used for emergencies or planned purchases are generally utilized wisely. Just because you may have a sky-high credit card limit does not mean it is a good idea to use it on lavish vacations you know you cannot afford. Thirty percent of your credit score is based on how much of your available credit you are using, so maxing your credit cards drops your credit score. When applying for loans of any kind, high credit card balances often lead to denied applications. Repaying the balance of the debt can take years, and maxing out cards often leads to higher interest rates, compounding the debt further.

3. Not Drafting a Will or Assigning Power of Attorney

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The topic of death is often ignored even though it is something everyone must face. If you do not have a will, the state determines who receives your assets and even your children. Planning ahead helps ensure your legacy and the stability of your family. Drafting a will and naming your beneficiaries and guardians helps you maintain control of these important matters in the inevitable event of your death. It is also important to review and update your will every few years by speaking to an attorney.

Another important document is the power of attorney, which designates a person to make important decisions on your behalf. Power of attorney is normally given to a spouse or trusted family member who can make financial and health care decisions, and sign important documents such as tax returns.

4. Not Knowing What Is on Your Credit Report

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Not monitoring your credit report regularly can have lasting effects. Your credit report is the summary of your financial life story, and no one should know more about it than you. Errors are common, and if not disputed and removed, they have the potential to ruin your credit. Anyone, from potential employers, credit card companies to mortgage and auto lenders, can put great importance on your credit score. You can order a free copy of your credit report from each of the three credit bureaus every year, and disputing errors is not difficult.

5. Not Planning for Retirement

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Most Americans are tremendously unprepared financially for retirement. Make sure to participate in any available employer-sponsored retirement plan, especially if contributions are matched. Traditional or Roth IRAs are other tools to build long-term wealth that grows tax-free.

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