7 Signs of a Debt Problem and What to do Instead?

Credit and debt are a powerful tool to meet our materialistic goals. They allow us to buy our dream homes, luxury vehicles, exotic vacations and so on. Buying a new kitchen or a living room set is as simple as financing the purchase at 0% interest for 12 to 36 months. In the past, that would mean to save on enough cash in order to meet all of our obligations. But today, when the money runs out, we don’t need to stop spending, rather charge them to a credit card. We’re so used to using credit and debt that we often overlook the fact that the debt is racking up with every purchase. And if not controlled, it may pose a serious problem for your finances.

Here are 7 warning signs that indicate you might have a debt problem.

You Have Zero Savings

If you don’t have any savings, despite having a steady job, it could be a red flag that you have a debt problem. Debt, if not managed properly, will not only affect your savings but will also keep you from building up an emergency fund. This means, you will have to use a credit card to meet your unexpected expenses, which will further add to your debt.

Ideally, you should build a fully-stocked emergency fund, which is enough to cover your expenses for a few months, should you lose your job or meet a medical emergency. But if your debts are overwhelming you, it is often impossible to save any money, which again will become a huge problem sooner rather than later.

Your Credit Card is Over Limit

If at least one of your credit cards is over or near the credit limit, you are not really managing your debt efficiently. There is a reason credit cards have limits and even one maxed out card can damage your credit score considerably. In fact, your credit utilization is one of the biggest determining factors, when it comes to loan approvals. Your payment history is another major determinant. It is therefore advisable to keep your credit utilization closer to zero.

You make Minimum Credit Payments

If you have credit card bills are overwhelming you, forcing you to keep up with the minimum monthly debt payments, it is another give away that you have a serious debt crisis. Making minimum payments every month is a problem irrespective of what your debt levels are. You need to either earn more money to pay off your debts or lower your monthly obligations.

This is especially true if you have a large debt. In that case, you must make as much monthly payment as you can over the minimum limit. Even if you don’t have a large debt, it could take decades to pay off your debts with minimum monthly payments.

You have Large Minimum Monthly Payments

Another telltale sign that you have bitten off more than you can chew is that, even with your minimum monthly payments, you end up paying a large amount of your income toward your revolving debts. In fact, if you are paying 20% or more of your income as a minimum monthly payment (only for credit cards), you have too much debt.

A New Debt to Pay Off an Older One

Are you refinancing your house in order to pay down revolving debts? Or perhaps transferring credit card balances? If your answer is “yes”, you have a serious debt problem. Although mortgage debt has a lower interest rate, using refinanced home equity to pay your credit card bills is a road to disaster, especially if you miss on your home loan payments.

You Practice Paycheck-to-Paycheck Living

We all have our monthly essential bills to cover. But if you need to wait for your paycheck to arrive in order to pay these bills each month, it is another red flag. One missed paycheck or a financial crisis in your company will probably affect you more than anyone else, in such a scenario.

You’re Denied a Loan

A debt problem is often the reason why you are denied a loan. Even if you do get a loan, it is likely to be under very poor terms, when you have a debt issue hanging on your head. It is time to stop, take a step back and re-examine your situation. Review your credit reports immediately and start taking initiatives to improve your debt-to-income ratio. No lender will be willing to give you a loan unless you increase your creditworthiness.

Now that you know some of the most common signs indicating you have a debt problem; now the question rises is…

What to do instead?

The first step to improve your financial situation is to address the root causes of your debts. At the heart of your debt problem lies a poor financial plan. So, this should be your starting point and then, perhaps a few behavioral changes, especially towards your spending habits, and you should be able to gradually shift your financial situation. Here’s what to do instead:

Understand How Much is Too Much

While certain loans are unavoidable, it is important to draw a spending limit to each area. For example, your home loan shouldn’t be, ideally speaking, more than 25% of your income. Similarly, have a cap of 5% to 10% of your gross monthly income towards car payments. Remember that the value of the most luxurious car will also go down to half, once it hits the road. Likewise, avoid taking larger student loans and pay them off as soon as possible.

Credit cards are perhaps the most problematic area. It surely gives you the power to purchase anything, anytime, but you should be using it sparingly. Keep them for emergency use only – for unexpected circumstances that you really can’t afford. This is where you need to practice some level of discipline, including:

Buy only what you can afford in cash
Create an emergency fund
Pay credit card bills on time
Avoid unnecessary balance transfers
Don’t make impulsive decisions, especially when it comes to major purchases
Track all your credit card spending

Get Help

Sometimes your financial situations get so overwhelming that you need to reach out for help. Credit counseling services, for example, can help you create a plan to better handle your financial situations. They will not only help you create a debt repayment plan but also help you manage your money and provide you with all kind of financial advice.