The sad fact is that many people get heavily in debt because they just don’t know how to handle their finances and run into credit issues. Or they may get into financial trouble because of issues they could not control. For example …
- A reduction in earnings
- Health issues
- Educational costs
- A death in the family
On the other hand, many people get in trouble financially for things they could have controlled such as reckless spending. Young people who have not yet learned how to handle credit can be especially guilty of this – though it can happen to older people as well.
Identifying the biggest problem
One good way to know if you have – or will soon have – a serious debt problem is to calculate your debt-to-earnings ratio. You do this by adding up all your debt, divide this number into your monthly gross earnings and then multiply by 100. Here’s an example of calculating a debt-to-earnings ratio.
Monthly gross earnings after taxes: $3,000
Total monthly debt obligations: $1,600
$1500/$$3000 = .50 times 100 equals 50%
In this case, the debt-to-earnings ratio exceeds 38% meaning that a person with this ratio would have a debt problem and credit issues int eh future.
If your goal is to avoid having a problem with debt, there are some warning signs to watch out for.
- No savings or minimal savings – one big danger sign is that if you don’t have some money put away for emergencies. This means that one issue such as a trip to the hospital could instantly put you in deep debt.
- Inability to pay bills promptly – this is another danger sign that you could be in trouble. If this is the case, you need to create a household budget and maybe arrange for automatic bill payment as much as would be possible.
- Using payday loans to pay bills – if you have to do this, it’s a sign that you’re already struggling with debt and your problems will probably just get worse due to the excessive interest rates you’re paying.
- Making just the minimum payments on your credit cards – can easily lead to running up more debt as you continue to charge on the cards without actually reducing your balances.
- Maxing out your charge cards – if you’ve maxed out more than one charge card, you have too much debt. Plus, this can have a very negative effect on your credit score.
- Denial of credit – if you’ve applied for credit and been turned down, your situation is very serious and must be addressed immediately.
- Not aware of how much you owe – denial is not just a river in Egypt. If you don’t know – or won’t learn – how much you owe, you can just about bet you’ve already exceeded your limits.
- Lying to yourself, your family or friends – it’s a very serious danger sign if you find you have to lie about your spending habits because you’re ashamed of how you have mismanaged your finances.
- Calls from debt collectors – if you start receiving calls or letters from debt collection agencies, you’re in trouble financially with no ifs, ands or buts.
Get your debt back under control
If you see two or more of these warning signs, it’s time to get to work and get your debt under control. There is probably a consumer credit counseling service in your area. If so, you need to meet with a counselor and go over all your debts and income. The counselor will help you develop a payment plan and may even be able to work with your creditors to get your interest charges reduced and late fees waived so you might be able to get completely out of debt in just a few years and without having to totally sacrifice your lifestyle.