How to know you need help managing your debt

By Chika

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Last Updated: August 6, 2021

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Many consequences come with living in a society like ours, where debt is seen as the norm; it is not hard to fall into the debt trap. Data shows that more Americans are living in debt now than three decades ago. 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 because 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 the 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 stench of debt from oozing on our finances. Money problems can only be hidden for a little while because it is a full circle that always catches up. Following up on our debt is one of the sound financial decisions we would ever take. This would enable us to plan our finances better and focus on what we need, and not what we think we want. 

 

Signs that you need help managing your debt

Since we are bound to treat money emotionally rather than logically, it is quite challenging accepting 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 which would indicate that we need help in managing our debts, and help you remedy your debt problem faster.

 

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. 

 

You only make the minimum payment on your cards.

Having too much debt means that you are 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.

 

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 which is causing you to take up more debt. Even worse is having multiple cards maxed out. 

 

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 financial situation before issuing you any loan. It is a good litmus test to ascertain where your debt stands in relation to your income. If you have a high debt to income ratio, this is an indication that you have debt problems which 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.

 

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. 

 

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. 

 

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 our hampers 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 are unable to pay.

 

Debt collectors call regularly.

It’s hard to find peace and tranquility within ourselves when you are inundated with calls from debt collectors. The pressure is not something we would be able to take, which could force us to make rash decisions that could further worsen our financial situation. Plus, constantly checking up means that you have to put our plan on hold or on short-term because you have a debt collector on your neck.

 

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 that 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. 

 

How to Handle Your Debt Problem

Here are some tips to handle your debt problem.

 

Calculate your total debt:  Calculating your total debt enables you to know how much you would need to pay off your debt. Though the amount may seem boggling at first, it is the wake up call you need to take charge of your financial fortunes. It also enables you put form a plan on how best to tackle your debt.

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 would 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 be a better money manager.

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

It is always easier to deny that we 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 dealing with a 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 walk 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.

 

Photo by Towfiqu barbhuiya on Unsplash

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