How do you know when you need help managing your debt?
Many consequences come with living in a society like ours, where debt is seen as the norm; it’s not hard to fall into the debt trap.
With household consumer debt rising, and student loans making people postpone mortgage and marriage plans, there is little cause to doubt the influence of debt on our personal life choices.
Being indebted means your financial power is reduced. You are taking money away from other areas that can be used to build wealth and plan for the future.
Yet money is an issue many of us choose not to talk about freely. It is one of our most closely guarded secrets. Most of us do not feel uncomfortable talking about money, albeit without tension.
We like to maintain the aura of financial freedom, so we borrow to hide our money problems. But the reality is that our heart skips when we remember how much we owe.
Most times, we choose not to remember at all because the reality of our financial situation is a nightmare many of us do not want to face. However, it is hard to keep the influence of debt from oozing into our finances.
Following up on our debt is one of the soundest financial decisions we will ever take. This enables us to plan our finances better and focus on what we need, and not what we think we want.
9 Signs You Need Help Managing Your Debt
Since we’re bound to treat money emotionally rather than logically, it is quite challenging to accept when our debts have reached a critical point.
To avoid getting into a precarious situation where our debt determines our predisposition, there are warning signs to look out for that point out when we need help in managing your debt.
Yes, it’s scary. But the sooner you recognize them, the sooner you can remedy your debt problem!
Money problems can only be hidden for a little while – it’s a full circle that always catches up to you.
1. You never have enough savings.
One way to know if you are flush is the amount of disposable income available to you after you have settled all your debt.
If your debts are up, this leaves little for savings, which can plunge you into further debt when a significant financial setback occurs like losing a job or having car problems.
2. You only make the minimum payment on your cards.
Having too much debt means that you’re operating on a tight budget, so you scalp for money.
This includes making minimum payments on cards. This keeps you further in debt because you not only incur interests making you pay more money, but you also incur more expenses because responsibilities keep rising over time.
3. Your credit card is maxed out.
If your credit card is close to, or over the limit, it means that you have troubles managing your debt.
Maxing out your credit card means that you are having difficulties controlling your expenses, causing you to take up more debt. Even worse is having multiple cards maxed out.
4. Your debt-to-income ratio is high.
Checking your debt to income ratio is a sure way of knowing your financial status and how indebted you are.
This is the financial tool that lenders and finance institutions use to evaluate your situation before issuing you any loan. It’s a good litmus test to judge where your debt stands in relation to your income.
If you have a high debt to income ratio, it’s an indication that you have debt problems you need to address. You can calculate your debt-to-income ratio by adding up all of your monthly debts and dividing by your monthly gross income.
5. You are denied credit.
Credit card companies and lenders want to be assured that you have a strong likelihood of paying back your debt.
A sure sign that your debt situation is critical is when lenders refuse to loan you more money. This implies that your credit score has dropped, which has reduced your likelihood of paying back a debt.
6. When you default.
Defaulting on loan repayment is the most telling sign that you need help with your debt.
This implies that you have missed a payment. This has severe implications for your credit score and could lead to forfeiture of assets if not adequately handled.
7. You take new loans to pay old ones.
Many people think that the best way to get out of debt is by taking a new debt to pay an old one.
There is even the opportunity of consolidating our debt, which comes with a lower interest rate and the simplicity of making a single monthly payment. However, taking on more debt implies that your income cannot offset your present debt.
Taking up on more debt is merely buying time to repay the debt, as the amount owed is still present. This reduces your chances of being financially independent because it reduces the ability to save and invest for the future.
Taking on new loans such as home equity loans to offset debt is riskier, because you could lose your house if you can’t pay up.
8. Debt collectors call regularly.
It’s hard to find peace and tranquility within yourself when you’re inundated with calls from debt collectors.
The pressure is not something you can likely take for long, which could force you to make rash decisions that could make your financial situation even worse.
Plus, constantly checking up means that you have to put your plan on hold or on short-term because you have a debt collector on your back.
9. You overdraw your bank accounts.
This is similar to taking new loans to pay old ones.
Frequent overdraft on your account is an indication that suggests you have difficulties managing your debts. Overdrawing on your account incurs extra charges from the bank, which further pushes your finances into a precarious situation.
3 Ways to Handle Your Debt Problem
Okay, if you’ve spotted anything on this list that makes you worry about managing your debt, have no fear! This is the part where we help you figure out how to get out of it.
1. Calculate your total debt.
Calculating your total debt lets you to know exactly how much you need to pay it off.
Though the amount may seem mind-boggling at first, it’s the wake up call you need to take charge of your financial fortunes. It also allows you to start making a plan on how best to tackle your debt.
2. Control your expenses.
Expenses are what determine how much you have left to service your debt at the end of the month.
The lower your expenses, the more money you’ll have leftover to pay off your debt. Taking note of your expenses enables you to identify and cross out unnecessary expenses in your monthly budget.
It makes you more frugal and a better money manager.
3. Pay your debts regularly.
Paying your debt regularly is a sign of financial responsibility.
While you earn more points on your credit score for prompt payment, you also get to reduce the timeframe of your debt. If your debt does not have a prepayment penalty, you can opt to pay more frequently or increase your monthly payment.
Conclusion
When it comes to needing to manage and reduce your debt, it’s always easier to deny that you have a debt problem than face it.
This is why many people take up on new debt to cover their dismal financial situation. However, the most appropriate way of managing your debt situation is taking immediate action.
This is painful and requires a lot of discipline, but it is worth the effort if your finances are important to you. Start by knowing the situation of your debt.
Use a debt-to-income ratio calculator to access your debt situation in relation to your income. Set up a debt management plan and stick to it.
Also, prioritize the payment of your debt.
Start by paying the high-interest ones and work your way down. Cut down on credit card expenses and operate on a tight budget. The earlier you accept your debt situation and find solutions, the sooner you will achieve financial Eldorado.
Editor’s note: This article was originally published May 11, 2024 and has been updated to improve reader experience.
Photo by Towfiqu barbhuiya on Unsplash
Quite informative, thank you.