We all take debt at some point or other. However, it is a double-edged sword. When used correctly, it can be a boon and improve our financial life. But if spiralled out of control, it can give sleepless nights. Debt such as education or home loan can be constructive, while lifestyle-related ones can be highly destructive.
It is essential to keep debt under control. So how much debt is too much? It varies across individuals and depends on factors such as financial obligations, savings and spending habits, etc. However, you must pay heed to certain signs indicating too much debt. What are these signs? Let us find out.
It is one of the warning signs of debt problems when you find it difficult to pay bills on time. It indicates an issue with money management, and you have bitten more than you can chew. On the other hand, if you can pay the required bills on time, it shows prudent money management and is a testament that your financial situation is under control.
Be it utility or credit card bills, it is vital to pay them on time as too much of it can increase your debt to income ratio and put you in a spot of bother.
A credit score is a three-digit score ranging from 300 to 900 that shows your creditworthiness. It is a vital metric used by lenders before sanctioning loans. A poor credit score raises questions about your repayment abilities and makes it difficult to obtain a loan. If you find your credit score taking a hit, it is an indication that you are overwhelmed with debt.
A poor credit score also sullies your credit report and makes it difficult to obtain funds when genuinely in need. If you find in your credit score dipping constantly, it is one of the foremost debt warning signs.
While credit cards provide an instant flush of liquidity, you must repay the amount borrowed on time. If you make only the minimum payment, the outstanding amount gets accumulated, and you are charged high interest. Credit card debt can unsettle your financial situation and negatively impact your credit score.
So, it is in your interest to pay the amount in full and not the minimum payment. While on some occasions, a monthly payment is alright, you must always strive to pay the amount. Paying just the minimum amount will make it much longer to pay off your debt and spell trouble for you.
Hence, if you regularly find yourself paying the minimum amount on the credit card, it is a warning sign of too much debt. It is also a sign that you have a problem with your cash flow.
This is a dangerous situation. When you borrow money to pay off creditors, you potentially push yourself towards a debt trap. This way, you are burdening yourself with more loans and interest payments. This is the time to seek help from a professional and seek ways for debt relief.
If you borrow money to pay off creditors from family and friends, you are likely to sour relationships, as in all likelihood, you will find it difficult to pay the money back on time since your financial situation is not sound.
If you start receiving multiple calls from lenders regarding missed payments, it is one of the major signs of debt problems. Note that if you have not paid your credit card dues or EMIs on time, you are likely to receive a call from a debt collection agency. With time, these calls can become troublesome and give you sleepless nights.
On certain occasions, these calls can become intimidating. To ensure you do not receive such calls, it is crucial for you to keep debts under control and pay off your dues on time. These calls can affect personal and professional relationships significantly and can rob you of your peace of mind.
If you rely too much on cash advance loans to meet both ends, it is a sign of too much debt. It is a sign of financial trouble, and though it may seem like a quick-fix solution, it can soon spiral out of control. Payday loans are the riskiest form of cash advance loan.
They carry very high-interest rates, and the repayment period can last from a few days to merely a couple of weeks. Opting for payday loans can derail your budget in no time and cause a debt trap, coming out of which can be a tall order.
Though it may look strange, but when you do so, it is a sign of poor debt management. People generally lie about their finances and spending habits when they find it difficult to manage debt. They feel lying can help them overcome the situation. However, it does not.
Lying about your finances creates mistrust and ruins relationships. Therefore, the moment you find yourself doing so, start taking proactive actions.
Now that you know the warning signs of too much debt, let us see the solutions to effective debt management that will help you overcome debt problems.
To improve your financial situation, create a budget. Outline your needs and differentiate them from wants. Make sure you direct a chunk of your income towards needs and keep wants to the minimum.
Too much expenditure on wants is one of the major reasons for poor debt. Therefore, it is in your interest to stem wants to ensure debt does not spiral out of control. You can implement the 50-30-20 budget rule to formulate a budget and get going.
In this age of instant liquidity, it is easy to fulfill instant gratifications. However, this could spell trouble and result in taking unnecessary debt. Obtaining personal loans to satisfy desires can strain finances as they carry a high interest. As Warren Buffet famously said, “If you buy things you do not need, you will soon sell things you need.”
It is in your interest to check your credit report and note down credit behaviour that has negatively affected your credit score. You can get a free copy of your credit report from credit bureaus. Equally essential is to focus on your repayment habit to build credit.
Pay more than the minimum amount and build a good behaviour by making small purchases and paying the amount in full.
If you are finding it challenging to make repayments on time, talk to your lenders to find solutions. If relationships are cordial, they will be willing to negotiate. They can either give EMI breaks or extend the due date to sort out your finances.
You can also seek professional advice to overcome debt problems. A professional can help you craft effective debt management strategies and explain the available options.
Acknowledging the debt warning signs is the first step to turning around your finances. The sooner you act, the better it is for you. Save first and spend later.
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