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by Holly Johnson
March 01, 2018
by Holly Johnson
March 01, 2018
In a lot of ways, racking up debt has almost become an American pastime. Buying a new living room set? Finance it for 12 to 36 months at 0%. Trading in your car? Well, of course, you'll want to get a new car loan – you can even stretch it out over 84 months to dull the pain. Going on vacation? Just charge it and pay for it later – I mean, that's what most people are doing, right?
We're so used to using debt for every purchase that it's almost unheard of to remain debt-free. And if you avoid debt, you may even be seen as some kind of weirdo.
But, how much debt is too much? For many, there's a very fine line to tread. While there's certainly nothing wrong with taking out a mortgage to buy a home, borrow too much and your finances could be stretched paper thin. The same can be said for car loans, personal loans, and credit card debt. No matter whether you qualify to borrow more money or not, there's a point where you borrow so much you put yourself at risk for financial peril.
If you're struggling with debt but aren't sure whether your situation is manageable or not, here are seven signs you're in over your head:
If you have credit card debt coming out the wazoo and regular bills to pay, you may barely keep up with your minimum payments, let alone pay anything extra toward your debt. If this situation sounds like you, it's very likely you've bitten off more than you can chew.
If you're barely keeping up with minimum payments each month, you need to find a way to lower your monthly obligations or earn more money – there's really no way around it.
Let's say you're struggling with debt already, but your balances keep growing every month. Whether you're making the minimum payments each month or paying down even more than that, if you're charging more than you pay, you're boosting your balances with each purchase you make. Paying $600 toward a credit card balance is great – but not if you're charging $800 in the same month.
In this case, you definitely have more debt than you can handle. And if don't put a lid on your spending, your finances could quickly spiral out of control.
One of the biggest determinants of your FICO score is your credit utilization, or, the amounts you owe in relation to your credit limits. If you have two credit cards with a total limit of $10,000, for example, and your combined balance is $7,500 between them, your credit utilization is 75%. (You want it to be closer to zero.)
This factor makes up nearly a third of your FICO score — only your payment history counts for more. Generally speaking, the more money you owe and the higher your utilization, the more likely your credit score will drop.
If your debts are so overwhelming that you're not saving any money each month, you're not alone. According to Go Banking Rates, more than half of American households had less than $1,000 in savings in 2017.
Ideally, you'll want to have a fully-stocked emergency fund – enough to cover a few months of expenses if you lost your job — or at least $1,000 stashed away to cover a basic emergency. Debts so hard to satisfy that they prevent you from saving any money will likely become a problem sooner rather than later.
If you need to wait until payday to cover essential bills each month, chances are good you're one financial emergency or unexpected bill away from a financial crisis. Keep in mind that it just takes one missed paycheck or a financial misstep for your ability to keep up with your bills to fall out of your hands.
If debt collectors have been calling to hound you over unpaid bills, then your debts have definitely grown out of control. Since your debt is in collections, this means you've fallen behind and failed to keep up with your monthly payments. Your credit score will start feeling the effects of your default rather quickly at this point, and you need to find a way out.
Last but not least, if you're borrowing money from family and friends to cover your bills, it's pretty likely that you're in over your head. You may have trouble repaying these loans unless something drastic changes with your debts or spending habits.
If any (or all) of the above factors describe your situation, there are plenty of ways you can start on the road to recovery – even though many of your options won't be easy ones. Instead of struggling, here are some steps you can take to get on the path out of debt today:
In times of financial crisis, it's crucial to cut the fat. When you're in debt and struggling to pay your bills, this typically means looking for ways to reduce your weekly and monthly spending so you can throw more cash toward your debts.
A bare-bones budget requires you to cut out all discretionary spending and focus on paying core housing, food bills, utilities, and debt obligations every month – in other words, not dining out, spending money on entertainment, or buying new clothes for a while. While a bare-bones budget can be too strict to maintain as a long-term solution, it can help you get a handle on your debts at the very start of your journey and get you started on the path out of debt.
When you're juggling too many debts at once, it can be difficult to keep track. Maybe you're just trying to keep up and constantly paying whatever bill is due most urgently, or you're paying a little extra on certain bills and not others with no rhyme or reason or real strategy behind it. In this case, it may help to get organized and create a plan of attack.
Start by sitting down with your spouse or partner so you can figure out exactly what your total debt load looks like. Then create a list of each debt you have, the current balance, the monthly payment, and the interest rate.
From there, you can figure out how to approach each of your debts. If you have several smaller debts, for example, you could attack them first using the debt snowball method – and just get them out of your life. If your interest rates are a bigger burden, on the other hand, you could use the debt avalanche and tackle the highest interest balances first.
Either way, it will help to have a full picture of where you're at so you can decide what to do next.
If you have a lot of debt at high-interest rates, a balance transfer credit card could help you buy some time to make extra headway. These cards offer 0% APR for anywhere from nine to 21 months, and some even come without a balance transfer fee.
If you're able to choose a card without a balance transfer fee especially, scoring 0% APR on transferred debts could help in a few ways; not only would it lower your monthly debt obligation since you wouldn't be paying interest, but it could help you pay down debt faster provided you continue to pay at least the same amount toward your debts you were paying before.
If you're considering a balance transfer offer, make sure to read the fine print before you pull the trigger. Ideally, you'll want to pursue a balance transfer card that comes with the lowest fees possible and has the longest introductory offer. You'll also want to make sure you understand any special terms and conditions so you can follow them to the letter.
However, keep in mind that a balance transfer won't work unless you do. To make the most of these offers, you need to pay down debt with fervor – ideally before your introductory offer ends. If you don't – and if you're lax about debt repayment – your introductory offer will end and your credit card's interest rate will reset, leaving you not much better off than you were before (or potentially worse off, if your debts are now at a higher rate).
Another way to lighten the load of mounting debts is to try to find a way to earn more money. If you could earn even a couple hundred dollars extra each month, you would be in a better position to pay down debt faster or start saving an emergency fund.
Picking up a side hustle is one way to earn money on the side while you also work full-time. Fortunately, it's easier than ever to find part-time work performing a wide range of tasks from assembling furniture to watching dogs, cleaning houses, or delivering groceries. Check out our posts on the best work-at-home jobs and side hustles to try this year.
Likewise, even a temporary cash infusion can help you pay down some balances and get some breathing room. If you have stuff you no longer use laying around the attic or basement, consider selling some items on eBay or Craigslist, and putting the proceeds toward a debt. It's just a one-time push, but if you can knock off an entire balance, that's one less monthly bill you'll have to pay from now on – freeing up more money to put toward your other debts each month.
The final way to help yourself in your journey out of debt is to stop digging. Unless you do something to change your spending habits, it's highly possible your debt troubles will get a lot worse before they get better
Consider switching to cash or debit only as you plan your strategy out of debt. It can also help to track your spending for a while to see what your weaknesses and trouble areas are. Either way, your debts aren't going away – and you could easily make them worse if you don't rein in your spending.
Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.