5 Signs That Your Debt Is Out of Control
When you’re deeply in debt, it’s easy to become so overwhelmed by your financial mess that you start to go into denial about just how much you owe: You stop looking at your credit card and bank statements, you don’t answer the phone anymore so you don’t have to deal with debt collectors, you leave your bills unopened because you know you can’t afford to pay them — and the entire time, you keep running up your credit cards because you don’t have cash, savings, or any other way right now to pay for the things you need.
None of us wants to admit that our finances have gotten out of control, whether our situation is due to avoidable mistakes or an unforeseeable personal crisis like losing a job or landing in the hospital. But the longer you avoid dealing with your debt, the more that debt is going to keep piling up.
The first step to getting out of a financial sinkhole is to recognize that you’re in one.
Here are five signs that you’re in over your head financially, along with five ways to help you take control of your bills and rein in your debt.
- You use credit cards for everyday purchases.
Instead of relying on your credit cards only as a last resort for emergencies or big-ticket necessities (like car repairs or a replacement laptop), you’re using your cards to help you get by from day to day, charging everything from your morning Starbucks to toilet paper to ordinary grocery runs.
The Fix: Start setting aside part of your paycheck for groceries and other day-to-day expenses. Then make sure you pay cash or use your debit card for basic purchases, so your $3 gallon of milk doesn’t end up costing you $25 in interest.
- You’ve maxed out multiple credit cards.
You couldn’t resist those dozens of credit card offers that invited you to take advantage of bonus miles, free gas, or low-interest introductory rates. And now, you’ve racked up so much debt that you’ve maxed out all those cards and your monthly credit card bills are more than you can afford.
The Fix: First, cut up all your credit cards, or stick them in a large container of water and shove them in the freezer. That way, the next time you’re tempted to spend, your cards will be on ice.
Once you’ve eliminated easy access to your cards, come up with a debt reduction plan that suits your specific situation, whether it’s as simple as cutting back on the frills and devoting more of your monthly income to paying off your debt, or something more involved, like enrolling in a credit counseling, debt settlement, or other debt relief program.
- You only pay your minimums each month.
According to Steve Rhode, co-founder of the debt counseling service Myvesta, Americans have become “addicted to minimum-payment crack.” Although just making your minimum payments may leave you some extra spending cash each month, you’ll take longer to pay off your debt, and you’ll end up paying hundreds or thousands of dollars more in interest in the long run.
The Fix: If you’re making minimum-only payments because that’s all you can afford, consider transferring your high-interest debts to a lower-interest credit card, and then tackling your consolidated debt by making larger payments on that low-interest account.
As soon as you can afford to pay more than your minimums, start paying as much as you can each month, even if it’s just $10 or $20 more than the minimum payment on only one of your accounts. Every extra dollar that you put toward paying down even just one of your debts each month translates into less interest that you’ll have to pay.
- You know you’re in debt, but you don’t know how much.
You purposely avoid opening your bills and credit card statements so you don’t have to face the numbers. As long as you don’t know for sure exactly how much you owe and there’s no actual dollar figure you have to deal with, your debt somehow seems a little more removed, a little less real.
The Fix: Ease yourself into dealing with balances that intimidate you: Go one account at a time, bringing yourself to list one balance each day until you’ve got all your debts written down. Then go back and write down your minimum required monthly payment for each account.
The amount of money you need to spend each month to make all your minimum payments (excluding your mortgage) shouldn’t exceed 20 percent of your net monthly income. If it does, you may want to look into a credit counseling program that could help you establish a debt management plan to reduce your monthly payments.
- Your creditors won’t stop calling.
You’re being hounded by creditors because you’re delinquent on one or more of your accounts. The bad news is, besides having to deal with the stress and annoyance of constant collection calls, you’ll likely find that your credit score has taken a significant hit for those missed and late payments. Your payment history accounts for 35 percent of your FICO score — more than any other single category.
The Fix: Try to work with your creditors to lower your interest rates. Of those consumers who made a single call to their credit card companies, 56 percent were able to lower the annual percentage rate on their cards, according to a study by the Massachusetts Public Interest Research Group. Those customers who were successful were able to reduce their rates by as much as one-third.
If you’re not able to get your credit card company to grant you a lower interest rate and you’re still dodging creditor calls and struggling to make your minimum payments, a credit counseling service may be able to help you. Professional credit counselors, working on your behalf, may be able to get your creditors to agree to reduced interest rates and lower payments as part of a credit counseling debt management plan that’s designed to help you pay off your debts with monthly payments that you can afford.
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