American consumers reached a financial milestone in the summer of 2017, but it was hardly a cause worth celebrating.
According to the Federal Reserve, U.S. consumers credit card debt, reached $1.021 trillion, the highest amount of credit card debt in history. Annual growth rate for that debt is 4.9% and American households owed an average of $10,955.
This page will highlight real-life signals of debt problems and how a debt management program could help address them.
How many of these warning signs of financial problems apply to you?
This is pretty basic stuff. Debt is a result of spending more than you make. It can happen easily if you don’t have a budget to track both sides of the equation. If you are spending more than you earn, there are two solutions:
- Cut expenses
- Find a way to make more money
Yes, it sounds simple, but if people put these simple principles into practice — and stuck to them — they wouldn’t have debt. That might mean cutting back on eating at restaurants, skipping a night on the town or passing up that new electronic gadget, but the reward is regaining control of your finances.
Serious red flag here. When you apply for credit, the lender will check your credit report and score to see what kind of risk you represent. A low credit score — along with a credit report filled with late or missed payments — tells the lender you won’t be able to pay back the money. That is how you get denied credit.
Paying Overdraft Fees
If you’re constantly paying fees for overdrawing your checking account, it’s a good indication that you need to scale back your lifestyle. Whether it’s lack of education, responsibility or financial discipline, this could lead to serious financial problems.
Over The Limit Fees
Credit cards generally charge fees if you spend over your credit limit. That is an additional charge that is easy to avoid, just by paying attention to your balance. Anytime your credit card balances surpass 80% of your credit limits, you have a problem that needs addressing.
Too Many Cards
Too many credit cards inevitably leads to too much debt. When was the last time you have a zero balance on your credit cards? Can you pay off your combined credit card debt within one year? If the answer is “no”, then you’re probably headed for trouble.
It’s OK to use credit cards for small purchases, such as gas and food, for convenience sake, as long as they are paid off each month. But if you turn to credit because you never have cash for basic purchases, it’s time to seek some help.
High Debt-to-Income Ratio
Your debt-to-income ratio measures your amount of debt against your income and tells lenders whether you can afford repayments. There are two ways to calculate a DTI. The first includes your mortgage/rent obligations; the second one does not. In both cases, divide total monthly debt obligations by your total monthly gross income. For example, if you have $1,000 a month in debt obligations that includes $500 for rent and $2,000 a month in income, you have a 50% DTI (1,000 ÷ 2,000 = .50). If you do it without the rent, you have a DTI of 25% (500 ÷ 2,000 = .25). Experts like a DTI at 35% or less, if you include rent/mortgage. Without rent/mortgage, they suggest a DTI under $25%.