Let’s take away the stigma that all debts are bad – they’re not. Not all debts cause your finances to go downhill as there are debts taken for a good cause. A few examples are student loans, mortgage, and any personal loan taken for an investment that will grow in value or produce long-term income. The bad thing is, not all people who take out loans, even the good ones, are wise enough to know when they’re headed for a financial disaster with their debts.
If you have taken a big loan, or are currently settling a quantity of small yet high-interest debts, here are the 10 signs you’re going toward a debt crisis.
1. You live paycheck to paycheck
You are struggling to make ends meet. You are earning less than you spend. You find yourself swiping more than you can afford. If you’re experiencing this, sit down and compare your spending with your earnings. Calculate your debt-to-earnings ratio by dividing your fixed monthly debts by your earnings. Getting 40% or higher can be a bad sign.
This is the time to evaluate your spending and check for some areas where you could cut costs. You may limit occasional family dinner outs, sell some possessions or get a second job.
2. You use credit or short-term loans to cover basic needs
Credit cards and short-term unsecured loans like payday loans are high-interest debts that should only be used for emergency purposes. Experts suggest using cash for everyday expenses, like groceries, clothing, and gas. So if purchasing these basic needs seems to be emergency you have to use a credit for, then you might be on the brink of a financial disaster.
You have to think about ways to raise cash and cut your spending to reverse your trend toward debt.
3. You use credit to “afford” something you cannot afford
If you know your monthly income is stable and you can pay it off without harming other necessary expenses, then it’s okay to buy that expensive phone with your card. But if you’re counting on a windfall that may or may not come, then you better pump your brakes.
The golden rule is if you can’t afford it, don’t buy it. Remember that the money on your credit card is not yours – it’s something made available for you to borrow, thus something you should return.
4. You use one loan to pay off another loan.
It’s like borrowing money from Steve to pay Paul and borrowing from David to pay Steve. By doing this frequently, you’re just piling debt on top of debt.
One exception is if you were to transfer your balances to a 0% interest balance transfer credit card, which has an introductory timeout period of 6 to 18 months. That means you can have more time to reduce your balance without paying interest and be debt-free before the introductory period expires.
5. You transfer balances… constantly
As mentioned, there are instances when a credit card balance transfer is actually beneficial if you need to consolidate balances or to get a lower interest rate. However, transferring balances frequently instead of paying them down is a red flag. There may come a time when you run out of credit cards to transfer balances to so you have to figure out a way to settle your payments before this happens.
6. You make only the minimum payments
If you can’t pay in full, making minimum payments is one way to avoid those hefty late fees. While it’s acceptable, you might be headed for a decade-long financial disaster if you always find yourself too strapped for cash to make these minimum payments. Little payments disable you from getting out of debt sooner. The interest accrued in the long run might be more expensive than the initial cost of the loan.
7. You are not paying bills on time
What’s worse than struggling to make minimum payments? Not being able to pay at all. If you don’t pay bills on time, your money is constantly being put on late fees. It also damages your credit score
8. You pay overdraft fees
Overdrawing your checking account is a harsh wake up call. It simply tells you that you just don’t have enough money to sustain your current lifestyle. In addition, you might also be denied more credit or other lines of credit when you reach or exceed your credit card limit.
9. You find yourself always juggling bills
In the short run, skipping some bills to pay other bills may help you but not over time. You settle the “hottest ones” first. You make minimum payments on debts with higher interest rates and nearer deadline, and you ignore the others for a while. When done in the long run, it can damage your credit score and can cost you more money.
10. You have no emergency or retirement fund
Of if you do, you constantly find yourself sneaking money out of it.
Not only you jeopardize your future income in order to settle present debts but you also lose the returns you would’ve generated had you not touched the money. When you run into an emergency in the future, you’ll have no safety blanket to rely on.
Author Bio: Carmina Natividad is a resident writer for QuickCash, an Australian-based business, providing short-term cash loans for your borrowing needs. She is passionate about writing articles regarding personal finance, money hacks, and responsible borrowing tips.
