Many people know when they’re struggling financially. Intuitively, we feel the pressure of not having enough cash to meet all of our obligations. Those of us who live on a cash basis don’t have a choice but to stop spending when the money runs out.
Credit and debt distort our intuitions. When things get charged to a credit card instead of paid for outright, we don’t feel the same sense of pressure. It’s easy to spend with credit cards—by design—and easy to lose track of our spending.
So while we know when we have money problems, we don’t always know when we have a debt problem. Here are some warning signs that indicate your debt might be building to a crisis.
1. You make minimum payments.
No matter what your debt levels, making minimum payments is a problem. Even if your debt isn’t that large, you could spend decades paying it off if you only pay the minimum required monthly payment.
- If your debts are large it’s even more important to pay as much as you can over the minimum every month.
2. Your minimum monthly payments are large.
If you add up all of the minimum monthly payments toward your revolving debts—that’s credit cards, not auto and home loans—and that minimum required monthly payment is 20% of your income or larger, you have too much debt. Exceeding 15-20% of your income risks not 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.
3. Collection activity.
Debt collectors calling or creditors threatening you with things like wage garnishment or repossession are signs of a debt problem. This may seem obvious, but some people reason that they’re just forgetful, and they have enough money to make their payments. Even if money isn’t an issue, missing payments is a problem! Debt problems include more than just insufficient funds—if you’re not organized enough to make your payments on time before you get sent to collections, you have a debt problem, regardless of your financial situation.
- 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. Paying one debt with another.
If you’re transferring balances from one card to another to stay afloat, or refinancing your house to pay down revolving debts, you have a debt problem. It might seem like a good idea to use refinanced home equity to pay down credit card balances; mortgage debt carries a much lower interest rate after all. But in our long experience, using home equity to pay off credit cards has a high potential to end in disaster. For one thing, the consequences of not paying a home loan payment are much worse than missing credit card payments. The other problem is that you won’t have addressed the root causes of your credit card debt. By spending all of your home equity on paying off other debts, you wipe the slate clean and leave yourself in a position to take on even more debt. And there won’t be home equity next time you find yourself in over your head.
- 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.
5. 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, there are also very high one time charges, either 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. If you find yourself using cash advances for regular bills and expenses, you have a debt problem.
- Never get a cash advance unless it’s a genuine emergency. If you’ve already taken out cash advances to pay down debt, make repaying the advance a top priority, because that balance is carrying a much higher interest rate than your other debts.
6. Loan denials.
If you are turned down for a loan or credit card or if you can only get a loan under very poor terms, stop and re-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.
- 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. Build an emergency fund, save for retirement, save toward homeownership or your kids’ college. If your budget does not include a savings plan, start right now. If you simply can’t 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 to stay afloat—then you have a debt problem.
- 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 don’t know your debt situation or have a budget.
Do you know exactly how much debt you have and what it will it 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 balances? If you don’t have ready answers to these questions, you have a debt problem. Again, even if you have plenty of money, not being on top of your debt situation is a problem in itself. And if you’re going out of your way to avoid opening your credit card bills 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.
- 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.
If you have a card that is maxed out or near its limit, that’s a problem. If you have to try more than one card at the register until one of them is accepted, then it’s time to stop borrowing and take stock of your situation. Also update your budget to make sure you have a plan to get everything paid off.
- Stop using credit cards for purchases until you’ve paid down your existing balances to manageable levels. If you’re getting declined at the register and you don’t think your debt is out of hand, there’s likely a problem with your account. If you haven’t gone over your credit limit, your creditor has probably frozen the account for security reasons. Contact your creditor, and pull all of your current statements and look for signs of identity theft.
10. Your debts are affecting your personal relationships.
Do you actively keep your partner in the dark about the household debt situation? Are you routinely borrowing money from friends and family to make ends meet? Are you nervous about what would happen if anyone you know were to see your credit card statements? Lying or hiding financial information from your loved ones is a strong sign of a debt problem.
- 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 our downloads page.
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, credit.org can help. It doesn’t matter if it’s credit card debt or some other financial obligation—our financial coaches are certified through the National Foundation for Credit Counseling (“NFCC”) and can help you create a budget and come up with a workable plan to address your debt situation.