Many people know when they’re struggling financially. Intuitively, we feel the pressure of not having enough cash to meet all of our obligations. If you live on a cash basis, you will find yourself with no choice but to stop spending when the money runs out.
Credit and debt distort our intuitions. When you charge a credit card instead of paying outright, you don’t feel the same sense of pressure. Because they are designed for ease of use, it can be just as easy to lose track of your credit card spending.
Although money problems can feel obvious, debt problems might be harder to identify. Here are some warning signs that indicate your debt might be building to a crisis – plus, insights on how to fix your debt problems in its tracks.
1. You make minimum payments.
Lower payments are great for consumers because they are flexible. However, minimum payments are designed to keep people in debt longer. By only chipping away at the debt, you’re stuck revolving your debt month-to-month while interest racks up.
No matter your debt levels, making minimum payments is a problem. Even if your debt is relatively small, you could spend decades paying it off if you only pay the minimum required monthly payment. For larger debts, it’s even more important to pay as much as you can over the minimum every month.
- How to solve it: Start by setting up automatic payments to avoid missing any due dates. Try setting aside more money every month to help take that debt down faster. If minimum payments are all you can do for now, try looking for a side job to earn some extra income.
2. Your minimum monthly payments are large.
When debts are scattered, it’s important to add up the monthly payments to see how much you’re dedicated to this type of bill on a regular basis. Below are some steps to check if your monthly payments are too large:
- Start with a blank sheet of paper. Write down your take-home income for the month.
- Calculate the value of 20% of your income. This can be done by multiplying your take-home income by 0.2.
- Then, look at your bank account and/or credit card statements.
- After documents are open, make a note of all of your minimum payments.
- Add each of the minimum payments together.
- Compare that value to the number calculated in step 2, the 20% of your income.
- Make a decision based on the figure: If the total value of minimum payments is the same or higher than 20% of your income, your monthly payments are too large. If they’re less than that, start allocating more than your minimum payments toward your debts.
Ideally, the amount of money you’re paying towards your credit card debt should not exceed 15-20% of your income. Paying over this threshold puts you at risk of not having enough income to cover your housing, food, transportation, and other necessities.
It’s critical that you pay down your balances so the minimum required is a smaller part of your income. Keep paying 20% until everything is paid off, of course, but if you’re paying 20% of your income and barely paying the minimum required, you have a debt problem.
- How to solve it: It’s critical that you pay down your balances so the minimum required is a smaller part of your income. Keep paying 20% until everything is paid off. If you’re paying 20% of your income and barely paying the minimum required, you have a debt problem. Creating a budget and sticking to it can help you stay on track and out of debt.
3. You’re struggling with debt collectors.
In 2016, debt collection was the largest source of complaints in the Federal Trade Commission’s (FTC) database of consumer complaints, generating more than 850,000 complaints. One of the more annoying warning signs, this debt problem can only really be solved by settling your outstanding debts.
Debt collectors calling or creditors threatening you with things like wage garnishment or repossession can be hard to manage. If you have the money to pay off your debts, you should begin to make payments every month. Making payments on time will not only lower your debts, it will stop collectors from making these threats.
- How to Solve it: Be careful about communicating with collectors, as you may obligate yourself to pay balances you don’t truly owe. Get professional help from a credit counselor to learn your options for debt repayment.
4. You’re using balance transfers and refinancing to stay afloat.
Balance transfers, or the act of transferring outstanding balances from one card to another, is a common transaction for those looking to lower their monthly interest rate payments. Similarly, many homeowners refinance their homes to pay down revolving debts. But if you’re considering one of these two options regularly, you have a debt problem.
It might seem like a good idea to use a refinanced home equity loan with lower interest rates than credit cards to pay down credit card balances. However, using home equity or other methods to pay off credit cards has a high potential to end in disaster.
- How to Solve it: Before taking on new debt to pay off existing debt, you’ll need to address the root causes of your debts and change your behavior going forward. Ideally, you should focus on paying off debts that you have before taking out a new one. If balance transfers are unavoidable, try finding one with low or no balance transfer fees.
5. You rely on cash advances.
The worst way to use a credit card is to get a cash advance. Not only is the money loaned to you at the worst possible terms, it often comes with high one-time charges as a flat rate or a percentage of the amount. A $1,000.00 cash advance could have a one-time fee of $50.00, plus interest for any unpaid balances.
Plus, if you take a step back and think about what the money could be used for, it’s likely to fund an emergency or an unplanned bill. Saving for an emergency fund now will create a safety net to help offset the amount you still need for emergencies, or pay for it altogether.
- Never get a cash advance unless it’s a genuine emergency. Using cash advances for regular bills and expenses is a sign of a debt problem. If you’ve already taken out cash advances to pay down debt, make repaying this advance a top priority to avoid paying its drastically higher interest rate.
6. You’re being denied for loans or credit cards.
When it’s time to take out another loan, waiting for approval is nerve-racking. Once you’re turned down for a loan or credit card, or even if you can only get a loan under very poor terms, stop and examine your situation. If your excessive debt levels lead a lender to deny or extend further credit to you, you probably have a debt problem.
- How to solve it: Review your credit reports and correct any incorrect or outdated information. Then work to pay down balances to improve your debt-to-income ratio and increase your creditworthiness.
7. You’re not building your savings.
Every month, you should be putting money into savings. This takes many forms: build an emergency fund, save for retirement, homeownership or even your kids’ college. If your budget does not include a savings plan, start right now.
Learn More: How to Manage Your Savings Account
The point where you’re unable to save money is where you need to start examining where your finances stand. If you simply can’t save because there’s not enough money left over after paying your bills, you may have a debt problem. If your savings are decreasing instead of increasing or if you’re dipping into your retirement funds to stay afloat, you have a debt problem.
- How to Solve it: Start saving 5% of your income for emergencies and savings goals. Budget aggressively to set aside extra money to reach this amount, and as you pay down outstanding debts, increase the amount you are putting into savings to 10% of your income.
8. You’re unaware of your debt problems or have a budget.
Ask yourself: Do you know exactly how much debt you have and what it will take to be completely debt free? If you have more than one credit card, do you know how much you owe toward each one and have a plan to pay off the entire balance?
These questions should have simple answers – you should know the next steps in your plan to be free of debt. If you don’t have ready answers to these questions, you have a debt problem.
Even if you have plenty of money available, you need to leverage it to become debt-free. And if you’re going out of your way to avoid opening your credit card bills or emails because you don’t want to see how bad things are, then you already know you have a debt problem, and it’s time to do something about it.
- How to Solve it: Attend a free online budgeting webinar or take a free course, then create a budget right away. Budgeting starts with tracking your spending, which includes assessing your overall debt payment situation. Knowing where you stand is the first step toward getting on the right track.
9. You’re over-limit or getting declined at the point of sale.
Credit cards are useful for daily costs, especially when the balance is settled regularly. If you have a card that is maxed out or near its limit, you have a credit card debt problem. If you have to try more than one card at the register until one of them is accepted, it’s time to stop borrowing and take control of your situation.
- How to Solve it: It’s important to stop using credit cards for purchases until you’ve paid down your existing balance to manageable levels. Do what you can to get closer to handling that debt to have a good debt-to-income ratio.
10. Your debts are affecting your personal relationships.
Do you actively keep your partner in the dark about the household debt situation? If so, you need to take a look at your finances and find a way to become proud of them. Whether that’s being honest with yourself about your position or starting to pay down debts until you are, you’ll need to find relief. Hiding financial information from your loved ones is a strong sign of a debt problem.
- How to Solve it: If you haven’t created a household budget that includes the active participation of everyone in your family, you need to open up and get everyone on the same page. Check out our free “Couples & Money” and “Raising a Money-Smart Child” workbooks from Credit.org’s downloads page.
How to Fix Your Debt Problems
There are plenty of other warning signs to look out for with regard to financial troubles; the ten listed here focus specifically on debt. If you are struggling with debt, or showing any of these warning signs, we can help. Our coaches can help you create a budget and come up with a workable plan to address your debt situation.