Most Americans carry debt. But how do you know when your debt has crossed the line from manageable to taking over your life? Out-of-control debt leads to stress and is the cause of many failed marriages. Take a look at these signs to determine whether your debt is out of control and, if so, what you can do about it.
1. You Pay the Minimum on Credit Card Balances.
When you pay only the minimum required, you pay strictly interest. To pay down your debt, you need to pay on the principal amount. While everyone occasionally has a tight month and can pay only the minimum, if this is your habit, consider it a major red flag.
2. You've Maxed Out your Credit Cards
If your credit cards are frequently declined when you try to make a purchase because you constantly flirt with your credit limit, this is another warning sign. You are likely doing damage to your credit rating. One way credit ratings are calculated is to measure the ratio of available credit to debt. If your debt matches your available credit, you have a problem.
3. You Purchase Essentials on Credit.
Credit cards should be for emergencies, unless you use them specifically to accrue sky miles or other points. If you consistently purchase staples, such as groceries or gasoline, with your credit cards, you might have a problem — especially if you have no plan to pay them off monthly. Even worse, if you use one credit card to make a payment on another credit card, you definitely have a debt problem.
4. You Don't Know Where Your Money Goes Each Month.
Are you familiar with this situation? You compare your monthly income to your monthly expenses and discover you earn twice the amount of your total monthly expenses. Where is the rest of the money going? Why do you struggle at the end of each month? Money has a way of slipping stealthily away, and unless you carefully plan and track your expenditures, you might fritter away your paycheck on small indulgences and steadily fall further behind on your bills.
What Can You Do?
If any of these warning signs ring a bell for you, it's time to think about how to get your money and your debt under control before your finances completely fall apart and you are harassed by collection agents or losing your utilities. Start with these tips:
- Prepare a monthly budget. Focus not only on regular expenses but on spending money, entertainment costs, and unexpected expenses to make the budget realistic.
- Track everything. Just as people on weight-loss plans are encouraged to track every morsel of food that goes into their mouths, you should track every penny that comes in and goes out. Keep your receipts throughout the day, or carry a small notebook to track daily expenditures from your morning latte to your trip to the grocery store.
- Contact creditors to set up repayment schedules you can afford. This may sound difficult and/or embarrassing, but most companies understand and are willing to help you pay your debt because they want their money. A debt repayment plan is especially important for secured debts such as your mortgage. You don't want to be the next foreclosure statistic.
- Consider credit counseling. If you in over your head and a creditor isn't willing to work with you, visit a nonprofit, consumer, credit counseling service. Experts can help you deal with the creditor and set up a monthly payment plan for you. Be careful though. Many so-called credit counseling services are scams. Look for an organization that will meet with you in person free of charge.
Debt consolidation may be a possibility if you have the option to transfer your debt to a single, low-interest loan. Again, be cautious. The worst damage a credit card can cause is a trashed credit score; if you transfer your unsecured debt to a secured loan, like a home equity line of credit, failing to make your payments could result in the loss of your home.
Jessica Bosari is a freelance writer and blogger for various publications and her own telecommute writing jobs blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!