Avoiding Debt Trouble Before It Starts
Ever hear of the old parable of the frog who doesn’t know he’s boiling to death because the water only slowly increases in temperature and he doesn’t have the sense to jump out in time? That same analogy can apply to anyone who has suddenly realized that they may be in debt way over their head and it’s too late to cut back on their standard of living to fight off bankruptcy. In today’s aggressive financial climate, this sort of thing happens more and more. Current salaries are being decreased across the board while fees, interest rates on debt, and day-to-day expenses soar. It doesn’t necessarily take the loss of a job to get to the point where a medical emergency or family disaster pushes one overboard in an instant. That’s why consumers have to be really aware of when they are reaching that point of no return, and quickly reduce expenses before they can no longer recover the situation.
Here are some ways to tell when you might be getting into trouble in the near future:
Your Credit Score is Sinking - It’s like the thermometer that indicates when you might be headed into hotter waters. The three major credit bureaus, TransUnion, Experian, and Equifax, all keep track of different factors that influence your credit score: payment history, debt ratio, and legal judgments. If your score falls below 600, you are headed for some tough times. It will make it harder to get credit in the future, and also dramatically impact the rates you get for any loans you want now. If you’re already below 600, seek credit counseling to help you learn how to manage your finances and debt levels better.
Savings Are Too Low - Everyone should have at least a 3 to 6 month’s emergency fund set aside. If your job is in uncertain or in jeopardy, it would be wise to have at least 12 months of expenses set aside in the event that it takes too long to find another job. Americans are taking this advice to heart and the national savings rate has increased substantially. If you aren’t one one of these people, now is the time to start. Put aside at least 5% of your earnings in a savings account that bears interest. This way, as you continue to save money, it grows more and adds to the security of knowing that you are not as susceptible to quirks of fate as you were before.
Your Housing Expenses Are Over 28% Of Your Income - Whether you rent or have a mortgage, the standard portion of your gross income that should go to this expense is going to be 28% or less. This has to be evaluated every year too, if you have a variable rate mortgage or an apartment that has substantially increased in rent. One can get attached to a home and not look at the numbers objectively, and realize too late that a foreclosure is imminent if the house is not sold immediately. At that point, the loss of the home can have a catastrophic effect on the credit score and savings of the homeowner. It’s better to get out of a situation before it causes signficant financial distress, than to try and stick it out and lose all your savings, your credit score, and any chance for future economic recovery for a very long time.
Credit Cards Are Becoming Unmanageable - Rates are rising, even if you had no default on the loan. You might open your statement one day only to find your introductory 5.5% now a solid 30% or above. In addition, some credit card issuers are requesting larger minimum payments. Your payments can double overnight and there may be no end in sight. Try to pay down your credit card debt as much as you can. If you have no hope of making the payments, call the lender and negotiate a better rate, a payment plan, or close the account and find someone who is willing to lend to you for less. The good news is that many lenders are more than willing to negotiate with their customers during this time of severe economic distress.
You Have No Idea What Your Budget Is Like - You can’t get a handle on your bills if you don’t have a budget in place. It’s a good idea to keep track of all your bills on a monthly basis, on a spreadsheet, to see what’s going on with your balances, and if your payments are getting out of control. The more proactive you are with managing your bills, the more likelihood that you can avoid further late fees and penalties that creep in to wreak havoc with your budget.
This entry was posted on Tuesday, November 24th, 2009 at 11:32 am and is filed under Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
