4 Mistakes People Make After Getting Out of Debt

If you've recently paid off a mortgage or credit card balance that you've had for years, you're probably wary about taking out another loan.

Yet new statistics suggest that despite reservations, consumers are taking out new loans anyway. According to the Federal Reserve Bank of New York Center for Microeconomic Data's "Household Debt and Credit Report," Americans ended the fourth quarter of 2017 in more debt than ever in history with consumers owing $139 billion in mortgage debt (a 1.6 percent increase over the third quarter), along with $8 billion in auto loans, $26 billion in credit card balances and $21 billion in student loan debt.

If you've recently pulled yourself out of debt, use the extra income to take smart financial steps and reach your long-term spending and savings goals instead of falling prey to these all-too-common pitfalls.

[See: 8 Financial Steps to Take After Paying Off a Debt.]

1. Getting back into debt. Mike Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency headquartered in Phoenix, says that falling back into debt happens because "some folks feel deprived after years without credit."

According to Sullivan, people who have emerged from debt also understandably want to rebuild their credit, so they use credit cards. While there's nothing wrong with using a credit card, too many people don't take the time to examine the spending behaviors that got them into debt in the first place.

"We have had clients call us two years after completing a debt elimination program needing another debt elimination program," Sullivan says, referring to a type of plan that allows consumers to negotiate the monthly payments made to creditors for a small fee.

2. Closing your credit cards. Once you're out of debt, getting rid of your credit cards may seem like a sensible choice, especially if they've triggered substantial debt. But odds are, at some point in your life, you may want to buy a home, a car or take out a loan. And to get good terms on a loan, you'll need good credit. If you maintain bad credit throughout your life, you may still get a loan, but the interest rate will likely be high, and chances are, higher payments (or far more payments) will put you back into debt.

Many credit card experts will tell you to not close your credit card accounts because lenders like to see a long history of borrowing, and eventually those closed accounts will fall off your credit report, shortening your borrowing history. But a closed account with a zero balance will likely remain on your credit report for anywhere from seven to 10 years; it'll fall off after seven years if there are late or missed payments associated with the card; if the card doesn't have a negative history, it should remain on your report for 10 years. So, if you do close your account, it isn't as if your score will take a hit right away.

[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]

Instead of closing an account, "a better thing to do would be to cut up the cards, delete them from any site they are saved on like Amazon.com, and keep them open -- as long as there is no annual fee," says Misty Lynch, a financial consultant and certified financial planner with John Hancock Financial Center, an investment advisory firm in Boston.

Of course, some credit cards will close accounts if they go unused for too long. According to Jennifer Beeston, the vice president of mortgage lending at Guaranteed Rate Mortgage in the San Francisco Bay Area, "You still need to maintain a credit history."

She recommends using your credit cards, but if you're afraid to, she says you could do something simple. "On the credit card, literally charge one tank of gas and pay it off every month," she says.

3. No longer having financial goals. Tristan Desinor is a public relations specialist at OneSource Virtual, which provides employee benefits administration outsourcing and is based in Dallas. In 2016, she and her husband paid off a mix of credit card debt, a bank loan and a car loan amounting to $29,180 in eight months in a concerted effort that included Desinor getting a second job at a fast food restaurant.

When they became debt-free, "It was an awesome feeling," she says. But while Desinor and her husband were feeling relieved after eliminating their debt, instead of continuing on the financial path they had been on, they threw their energy into spending money, rather than saving.

The good news: Desinor says she and her husband didn't go into debt again. However, they had been spending $1,000 a month on credit card bills, and once they paid them off, instead of putting a good chunk of that thousand into a savings account, they spent their extra money on "travel, eating out, new clothes -- pretty much whatever fun things we could find," she says.

But this year has been different. "We've started 2018 with a concrete savings plan and are sticking to the budget," she says.

Her advice? "Don't stop the upward financial trajectory once you're out of debt. Just because you no longer have debt doesn't mean you are financially secure. There's still a lot more to do to build wealth."

4. Never checking your credit report. Some consumers who have extracted themselves out of debt and do not plan on taking out a loan assume they can permanently forget about reviewing their credit reports, Sullivan says. But you should still look at your credit report at least once a year to ensure nothing is awry.

[See: Should You Invest or Pay Off Debt?]

Why is that a good idea? Because Sullivan points out that even people who don't take out loans are still exposed to risk. "If their identity gets stolen, they will have serious issues resolving that," he says.