It’s almost impossible to go through life without borrowing money at some point. For most of us a mortgage, car loan or student loan is almost a certainty. According to the Federal Reserve consumers owe over $3.7 trillion! So if you owe some money you’re not alone.
If everyone is in debt at one time or another, why is debt such a big deal? Is there any reason why I shouldn’t just relax and forget about it? Keep making my payments and go on with life?
For most people that’s a possibility. You can just make your payments and your debts won’t be a big problem. But for others, debt has a way of creeping up on you. Becoming a bigger and bigger part of your life until it totally takes over your finances.
There are simple warning signs that debt is becoming a problem. See if any of these situations describe your finances.
Do you owe more than $10,000 combined on all your credit cards? And, the total owed is going up a little each month? That’s a sign that your expenses are outrunning your income. If you keep that up it won’t be too long that you’ll have trouble paying the minimum due each month. Now is the time to get your budget in balance or consider entering a debt management program with a reputable credit counseling agency.
Are you afraid to total up all your debts? Most of us don’t like the thought of facing bad news. Especially if that news requires us to take action. But that’s exactly the time that action is called for. If you wait the situation will get worse and the eventual solution will be harder to handle.
If you owe more each month and the credit card company has raised your rate it’s time to get serious about reducing the amount you owe. The reason that they raised your rate was because their statistics show that you’re likely to have trouble repaying them. You can say that they’re wrong and everything will be fine. But when unbiased statistics show that you’re heading from trouble, it’s time to take them seriously.
Has your credit score dropped 25 points or more in the last 6 months. Credit scores are one way that lenders decide how likely it is that you’ll repay their money. It’s also a good guideline as to whether you should borrow the money. If your credit score is low it’s an indication that you could be heading for trouble. Additional borrowing will increase the likelihood of that trouble.
If your mortgage is over 30% or your car payments over 20% of your take home pay you have a problem. It’s difficult to keep your expenses within your income if you’re spending too much on housing or transportation. It’s a problem that’s easy to fall into. You love the house or car. The salesperson tells you that it’ll be fine. Just treat yourself to what you want. But the payments tell a different story. You don’t have enough money left after those payments for groceries, clothing, etc. Each month is a challenge to see if you can pay the bills and still feed your family.
Should you take action? If you find that you answered ‘yes’ to any of these situations it is time to make some changes. Sure, you can wait if you want. But the future is clear. You’re heading for debt trouble.
And, one thing about debt trouble is always true. The sooner you take corrective action the less painful it is. If you really want to suffer wait to take action until your only choice is bankruptcy.
So be proactive now. Avoiding debt trouble is the first step towards your financial freedom.
Gary Foreman is a former financial planner who founded The Dollar Stretcher.com. Their motto is “living better…for less” Their free Dollar Stretcher Debt Course will introduce you to the tools you need to get out of debt. Sign up for their free weekly newsletter “Surviving Tough Times” Each issue will show you ways to save money that can be used to reduce your debt burden.
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