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Knowing how to use credit and debt properly can help you get a home and a car and even pay for your children to go to college. But for those who find themselves in too much debt, it can be a huge problem.
The important thing is to keep up with your debt payments, but that’s not the only thing. You need to be able to manage your finances overall, and that can take more effort. On top of this, if you’re using the money for your debt, it means you’re not using it for other things.
The Risk of Carrying Debt
If you have to spend on unnecessary debt, you will take away what you need for your future. If you’re trying to build wealth, that becomes even more difficult with too much debt.
However, understanding when you’ve crossed that line into too much debt can be difficult. Sure, you can get a mortgage for your home. But if you take out a loan that’s too large, you could be in trouble.
The same sometimes happens with personal loans, credit card debt, and car loans. It doesn’t matter if you can qualify. What matters is whether you can afford to make the payments.
A majority of Americans have a plan to reduce their personal debts within specific timelines, based on a poll conducted by Northwestern Mutual.
1. Your Debt Continues to Grow Each Month
If you’re already having trouble with your debt and you only continue to get more and more debt each month, that’s not a good sign.
Even if you can make the minimum payment or a little more, increasing your balance is never a good sign. It’s great to make a $600 payment. But charging $800 that month means you’re having some problems in the long run.
It means that you will need to do something about your spending, or you will have even more trouble with your finances.
2. You’re Making Late Payments
Skipping your payments means that you’re definitely in trouble with debt.
Each time you make a late payment, it means even more problems with your credit score, making it less likely that you’ll be approved in the future.
Not to mention you will end up with additional fees each time you pay late on your credit cards or loans.
3. You’re Making Minimum Payments
There are some rexcellentreasons to use credit cards and some great ways that they’re going to make things easier for you.
The problem is that those benefits are only good if you pay off the card every single month.
Keeping a balance on your card is going to detract from those benefits. You’ll spend more than you might think when you pay only the minimum.
You’ll pay fees, finance charges, interest, and much more for a whole lot longer than you might think. Paying no more than the minimum signifies that your debt is starting to get out of control.
4. You Have to Borrow Money to Make Bill Payments
When you’re borrowing from people you know or you’re getting a cash advance in order to pay a bill it means there is a very serious problem.
If you’re using a cash advance you’re doing the worst possible thing that you could with your credit card. You’ll get an insane interest rate plus fees for the cash advance.
You’re also going to have a problem trying to get money over and over again. You’ll eventually have to do something about the debt itself.
Figuring out what you can do to cut down your expenses and increase your income is going to make it easier for you to make your payments and not have to borrow from others.
5. You Applied for Credit and Were Denied
A credit card company doesn’t really want to give you a card if they think you’re going to be a big risk.
They want to make sure they’re going to get their money back. That means they look at your debt in making a final decision on giving you credit.
If you’ve been denied credit or you’re being offered really bad terms on your credit you should take a closer look at your debt.
This means that you have excessive debt, because lenders want to be able to get money from you. It means you definitely have a problem.
6. You Transfer Your Balance Too Many Times
Transferring debt from one account to another seems like a great idea. You can open up a brand new credit card that offers low interest and then transfer the balance you have over to another card.
The problem is that the introductory period is going to end. The interest rate is going to go up, and then what?
Most people open a new card and start the process over at this point.
It may seem like a great idea, but it’s really not. You keep moving the debt around and around, hoping that at some point you’re going to get it sorted out. But you’re not actually paying off anything.
You could end up owing far too much money and you could end up with missed payments or declined credit card offers if you’re not being careful.
Transferring your balance can be treated as a good plan if you’re careful about not purchasing anything else with that card and only paying off the new balance.
7. Your Credit Score is Going Down
If you carry a balance for a long time it’s going to increase your credit utilization ratio.
That number, if it gets above 30%, will cause your score to start going down. If you’re at 10% or less, on the other hand, you’re going to see improvements for your score.
The problem is, if you keep a balance too long you’re probably also going to have interest and fees that will continue to increase your ratio and continue to decrease your score.
This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.
At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.
8. You Have a High Debt-To-Income Ratio
When it comes to your debt-to-income ratio you’re looking at a percentage.
Lenders look at that percentage to figure out how much money you have going out compared to what you have coming in.
The best way to figure this out is to add up each. Then divide the amount of your money going out by your total income. This will give you a percentage.
Someone with an income of $10,000 and total debt of $6,000 will have a 60% debt-to-income ratio.
That’s going to be too high for most lenders who want you to stay at or below 40%. If you’re applying for a mortgage especially you want to keep your ratio as low as possible. If you’re at this level of 60% it means you’re definitely too far in debt.
It’s a good idea to pay attention to this ratio periodically, even if you’re not planning on making any major purchases. You want to make sure that you’re continually lowering this amount and not increasing it with new debt.
Your best bet is to start cutting your expenses or increasing your income.
You’ll be even better off if you can do both. If you do both of these you’re also going to increase and rebuild your credit and that may make it easier for you to use some of the special tools for improving your debt situation.
9. You Lie About Your Debt
If you tend to lie about how much money you owe it’s a sign that you know there’s a problem and you don’t want to admit it. You probably feel embarrassed about it and you’re worried about what people will think.
If you lose sleep or can’t concentrate because of your extreme debt you definitely need to do something about it.
Lying isn’t helping anything. It’s just making you feel worse. If you actually do something about that debt you’ll feel better faster.
Don’t Keep Ignoring!
Maybe you already know that you have a problem with debt, but you would rather deny it than do anything about it.
You’re probably worried all the time, but you still try to deny there’s a problem. Once you actually start doing something about your debt you might be surprised how much better you feel.
There are a couple of great ways developed by professionals exactly for such situations, such as debt avalanche or debt snowball methods.
It’s going to take hard work, time, and effort. It’s going to be difficult. But if you actually admit that you’re too far down that rabbit hole of debt and you start making changes you’re going to improve things for yourself.
If you let things just keep going the way they are and don’t make changes you’re just going to make the problem worse.
You don’t need to face it all alone. You can find professionals like nonprofit credit counselors and financial advisors. They’ll help you understand where you are, what your options are, and how to move forward.
That way, you can control your spending and create a payment plan.