Many people know when theyâre struggling financially. Intuitively, we feel the pressure of not having enough cash to meet all of our obligations. If you live on a cash basis, you will find yourself with no choice but to stop spending when the money runs out.
Credit and debt distort our intuitions. When you charge a credit card instead of paying outright, you donât feel the same sense of pressure. Because they are designed for ease of use, it can be just as easy to lose track of your credit card spending.
Although money problems can feel obvious, debt problems might be harder to identify. Here are some warning signs that indicate your debt might be building into a crisis â plus insights on how to fix your debt problems.
Debt can sneak up on anyone It starts small – just a few purchases here and there on your credit card. Before you know it, you’ve maxed out your limit and can barely keep up with the minimum payments If left unchecked, debt has the potential to wreck your finances and credit score.
But how do you know if your debt load is becoming a real problem? Here are 10 warning signs to watch out for
1. Your Debt Payments Exceed 20% of Your Take-Home Pay
As a general rule, your total monthly debt payments (not including rent/mortgage) should not exceed 20% of your take-home pay. If you find yourself dedicating more than 20% of your income just to make minimum payments, it’s a red flag that you may have taken on more debt than you can realistically handle.
2. You Only Make Minimum Payments
Minimum payments are deceiving – they seem manageable but do little to reduce your overall balance. If you routinely only pay the minimum due on credit cards and loans, interest charges will cause your balances to grow. Minimum payments indicate you are not chipping away at the principal debt amount.
3. You Rely on Credit Cards for Necessities
When you have to put groceries, utilities, and other necessities on your credit card just to get by each month, it’s a sign you are overextended. Relying on credit for daily expenses rather than just the occasional splurge is not sustainable long-term.
4. Your Credit Score is Dropping
A plunging credit score is a consequence of debt problems. Maxed-out cards, late payments, and exceeding your credit limits will cause your score to nosedive. Monitor your credit reports regularly. A decreasing score year-over-year means your debts are becoming unmanageable.
5. Debt Collectors Are Calling
If you are fielding calls from debt collectors, it means you have missed payments and creditors have assigned past-due accounts for collection. Being contacted by collectors is embarrassing and stressful. It also means your credit score is being damaged.
6. You Use Credit to Pay Off Other Debts
When you take out a loan or new credit card just to pay off an existing account, it’s like robbing Peter to pay Paul. You are paying down debt with more debt, exacerbating the problem. This “domino effect” is not sustainable.
7. You Apply for Payday Loans
Payday loans seem like quick cash but they come at an extremely high cost. Needing these predatory loans to bridge cash shortfalls until your next paycheck is a sign you are not living within your means. Relying on payday loans will create a vicious debt cycle.
8. You Don’t Know Your Total Debt Amount
Not knowing exactly how much you owe across all accounts is a huge red flag. Being unaware of your debt total makes it impossible to manage. You should be able to quickly tally your total liabilities, including mortgage, student loans, credit cards and other debts.
9. You Argue About Finances with Your Partner
Money conflicts can strain the healthiest relationships. If you find yourself constantly fighting with your significant other about money – especially debts – it may indicate underlying issues with your shared finances. Financial stressors left unaddressed can damage relationships.
10. You’ve Reached Your Credit Limits
Maxing out your credit cards and hitting your credit ceiling is a clear sign of financial trouble. With no remaining available credit, you cannot rely on cards to bridge temporary cash shortfalls. Having no borrowing power remaining means existing debts are becoming unmanageable.
What to Do if You See the Warning Signs
The first step is to honestly assess your financial situation and debt load. Make a list of all debts and minimum payments to understand your total obligations.
Next, examine your budget to see where cuts can be made to free up more money to pay down balances faster. Trading a daily latte for homebrewed coffee or eating dinner in vs. takeout a few nights a week can make a difference. Apply the savings to knock down high-interest credit card balances first.
You may need to take more drastic action such as working overtime, finding a side gig, or temporarily minimizing contributions to retirement accounts if your debt situation is dire. The sooner you can eliminate debt, the faster your credit score will rebound.
If your debts still feel completely overwhelming, you may want to consult a nonprofit credit counseling agency. They can help create a structured debt management plan and often negotiate with creditors for lower interest rates or waived fees. Bankruptcy is a last resort option if no other debt relief solutions are feasible.
The warning signs of problem debt are impossible to ignore. If you see multiple red flags, take action before it’s too late. With early intervention, dedication, and lifestyle adjustments, you can get your debts back under control before they ruin your finances.
Youâre over-limiting or getting declined at the point of sale.
Credit cards are useful for daily costs, especially when the balance is settled regularly. If you have a card that is maxed out or near its limit, you have a credit card debt problem. If you have to try more than one card at the register until one of them is accepted, itâs time to stop borrowing and take stock of your situation.
- How to Solve it: Itâs important to stop using credit cards for purchases until youâve paid down your existing balance to manageable levels. Do what you can to get closer to handling that debt to have a good debt-to-income ratio.
Youâre struggling with debt collectors.
In 2016, debt collection was the largest source of complaints in the Federal Trade Commissionâs (FTC) database of consumer complaints, generating more than 850,000 complaints. One of the more annoying warning signs, this debt problem can only really be solved by settling your outstanding debts.
Debt collectors calling or creditors threatening you with things like a wage garnishment or repossession can be hard to manage. If you have the money to pay off your debts, you should begin to make payments every month. Making payments on time will not only lower your debts; it will stop collectors from making these threats.
- How to Solve it: Be careful about communicating with collectors, as you may obligate yourself to pay balances you donât truly owe. Get professional help from a credit counselor to learn your options for debt repayment.
4 Warning Signs of a Debt Problem
FAQ
What are signs of debt problems?
- Difficulty paying bills on time.
- Receiving collection calls or past due notices.
- Living in your overdraft or line of credit.
- Losing sleep worrying about debts.
- Spending more than your income allows.
- Not paying credit cards in full each month.
- Impulsive spending due to financial worries.
What are danger signals of potential debt problems?
- your required monthly payments to creditors total 20% or more of your take home income (not including your rent or mortgage);
- you cannot consistently pay all your bills;
- your credit cards are maxed out;
- you can only pay the minimum payments on your credit cards;
What is the 777 rule with debt collectors?
The 777 rule governs how frequently companies can engage consumers to collect debt. The rule also stipulates the methods debt collectors can use when contacting debtors. The rule gets its name from a very specific stipulation. Companies aren’t legally allowed to call a consumer more than 7 times within 7 days.
What are the 5 C’s of debt?
Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.