One of the worst things about debt is how easy it is to get in trouble with it. For example, using your credit cards can be fun. Those two big, leather-covered recliners look really comfortable and would be perfect for your family room. So, what the heck? Just charge them on one of your credit cards. You could make just the required minimum monthly payment of $20 or $30 and you wouldn't be digging yourself into a debt hole would you? Well, maybe not unless you saw one or more of these four warning signs.
Warning sign #1: Using credit to buy necessities
If you can pay off your credit card bill in full each month, then using it to buy groceries is okay. However, if you're using it to buy gas, groceries or other essentials and don't have a plan to pay off your balances within 90 days, you may be digging yourself into a debt hole.
Warning sign #2: Your balances exceed 10% of your income.
Let's suppose you earn $60,000 year. In this case, if you're carrying more than $6,000 in revolving debt, your ability to react to a financial crisis could be limited. Carrying a balance in excess of 10% of your income is not exactly terminal but is a signal that you should start working to reduce your balances as quickly as possible. It's important to understand that this is different from having minimum monthly payments that exceed 10% of your income. If you have minimum payments this high, they will exceed your income. That's not a danger signal it's a glaring red sign that you should get to a credit counselor post haste.
Warning sign #3: Making just the minimum monthly payments
If you're in a position where you can make only the minimum monthly payments on your revolving debt (usually credit card debt), you need to worry - unless it's just a temporary situation. In many cases, the required minimum monthly payment will be only enough to cover your interest charges and will do nothing to reduce your balances. If you continue to make just the minimum monthly payments required, you could literally never get out of debt. In one example I saw recently, the person could get out of debt making just the minimum monthly payments but it would take him 17 years.
Warning sign #4: No cushion
You really need to have saved three to six months in living expenses as an emergency fund. If you don't, you're flirting with danger. Your employer could stop giving you overtime work, put you on furlough temporarily or terminate you. You could have an emergency medical issue or a big car repair bill. You need to think what would happen if you encountered one of these problems. If you believe this would put an immediate stress on your financial life then you're playing too close to the edge and need to bulk up your savings.
In summary
None of these for warning signs mean that you're in immediate danger of having a financial melt down. But they are just that - warning signs that you could be flirting with danger. So take heed and do what you can to start reducing your revolving debts before you do dig yourself into a big debt hole.
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