Having some debt is a normal part of life for many people. For instance, most people can’t buy a house, attend college or purchase a car without getting a loan. Plus, building a credit history often requires applying for a credit card or small loan.
But just because debt is a part of life doesn’t mean you should take on all you can. This thinking can cause your debt to spiral out of control. You can either recognise a problem and rein in spending, or you can refuse to face the truth and settle into a life of high balances. With average household debt rising to £13,000, it’s clear that many households are facing a real debt crisis.1 By recognising the signs of a potential debt problem, you can begin getting your finances on track before the problem becomes any worse.
1. Can’t Get Balances off Your Mind
Do you lie in bed at night worrying about your credit card balances? Do you think about your debt every day? You might make excuses, figuring that everyone is concerned about debt. And for the most part, you’re correct. Understand, however, that people with reasonable debt levels typically don’t lose sleep over their balances. If your debt concerns are affecting your sleep pattern and your overall help, you may have a problem.
2. Using Credit Cards to Pay Creditors
If you’re getting into more debt to payoff other debts, it’s time to wake up and recognise a problem. People who have a major debt problem often don’t have enough disposable income to pay their creditors. Since defaulting can result in a late fee and credit damage, these people may use a credit card to pay their mortgage, auto loans and other credit card statements. This method keeps creditors happy, but it doesn’t help the debt, as using credit cards to pay bills only adds to debt balances.
3. Have at Least One Maxed-Out Credit Card
Ideally, credit card balances should not exceed 30 percent of your credit limit. Therefore, if you have a credit card with a £2,000 limit, your balance should remain less than £600. A slightly higher credit utilisation ratio doesn’t necessarily indicate a debt problem — you might have a higher balance because of a recent auto repair or other emergency, for instance. But if your credit cards are maxed out or near their limits, and you haven’t dealt with any financial emergencies, re-evaluate your spending habits. In most cases, you’re spending more than you can afford, and if you keep on this path, you could end up maxing out additional cards and increasing your overall debt.
4. Can’t Pay off Your Balance Each Month
There are many reasons that justify using a credit card for everyday purchases. You might use your credit card to build reward points faster, and if you own a business, it’s easier to track spending with a credit card. In these situations, frequent credit card use makes sense — but only if you’re paying off your balance each month. Credit cards aren’t magic cards, and if you swipe your card for every purchase, yet only pay the minimum each month, a debt problem is inescapable.
5. Rejected for Credit Cards and Loans
Your payment history makes up 35 percent of your credit score, and if you pay all your creditors on time, it’s possible to maintain a fairly decent credit score in spite of high debt. But having a good or decent credit score isn’t always enough to qualify for new credit cards and new loans. Creditors not only review your credit score and income, but also your level of existing debt.
A high debt-to-income ratio can curtail financing opportunities, such as buying a house or car. If you apply for a loan or credit card only to receive a rejection letter because of too much existing debt, it’s time to stop ignoring your debt problem and develop a repayment strategy.
6. Scary Letters From the Bank
If your creditors are constantly calling you and sending collection letters every week, stop hiding from the problem and open your eyes. Too much shopping and too little income can result in falling behind on payments to your lenders and creditors. A solution: Work out a payment plan to get back on track and tackle your balances.
7. No Savings Account
If you’re spending 10, 20 or 30 percent (or more) of your income on debt payments each month, there’s probably nothing left for savings. There is no denying the importance of building an emergency cushion, as the money in your savings account can help you survive tough times. But if you have creditors on your back, or if you can barely afford your minimum payments, putting money aside for savings is likely the last thing on your mind. It’s one more reason to address debt sooner rather than later.
If one or more of these scenarios sounds like you, it’s time to get your debt in check. Consider taking the next steps to shed your debt, improve your credit and manage your finances in a way that doesn’t make you feel stressed every day. Use some of these debt-shrinking strategies to get you out of the red and moving towards savings.
1Milligan, B. (8 January 2017). UK household debt now a record £13,000, says TUC. Retrieved 8 May 2017, from http://www.bbc.com/news/business-38534238