Debt - Understanding It and Knowing When You're In Too Deep

Debt is almost impossible to avoid – no matter what your situation in life. But understanding the warning signs of debt can save you from a financial crisis.

Debt is money that you owe for goods and services. Most people have debt for large purchases such as a home, car or college education. Unless you count yourself among the happily wealthy, you won’t have enough cash on hand to purchase a house, car or college degree. Fortunately, there are banks, credit unions and lending institutions that help you to finance these large purchases. This type of debt is sometimes referred to as “ordinary debt.”

Ordinary debt becomes dangerous debt when your means to pay your debt exceeds your income. For example, many times a consumer qualifies for a mortgage that far exceeds what they expected. In their excitement, they purchase a home that is too expensive for them to handle when taxes, interest, insurance and utilities are taken into account. This is when the ordinary debt of a mortgage turns into a dangerous. Unfortunately, with the skyrocketing number of foreclosures, this is all too common.

The perfect example of dangerous debt is credit card debt. More often than not, credit cards are used to make purchases that should be paid for up front, like groceries, clothing and home furnishings. You should always try to avoid making day-to-day living purchases with a credit card. The interest rates and finance charges will accumulate faster than you can pay off the debt, throwing you neck-high into the proverbial debt mire. If you find that you are unable to pay for necessary living expenses without the use of a credit card, then you need to reevaluate your budget and cut out expenses that are unnecessary.

Identifying the warning signs of debt is easy but it may take some sacrifice and hard work to turn your dangerous debt into ordinary, manageable debt. Answer the following questions to help determine whether you are in too deep.

Do you spend more money than you earn?
Does 25-50% of your income go to credit card payments?
Is it difficult or impossible for you to make ends meet without using a credit card?
Are you only making the minimum monthly payments on your credit cards?
Are most or all of your credit cards at their maximum credit limit?
Are you consistently making late payments?
Do you have creditors calling you or sending collection notices?
Are your friends and family members receiving collection calls about your debt?
Are you afraid to open your door or answer the phone for fear that it is another bill collector?
Are you using credit cards to pay off other credit cards?
Are you frequently taking out cash advances on your credit cards to pay for living expenses or to make payments on other credit cards?
Are you living paycheck to paycheck with no money left over?
Do you feel the need to buy everything you see?
Do you frequently bounce checks?
Do you receive termination notices or have your utilities turned off?
Do you have frequent arguments with your spouse, partner or family over money issues?
Do you have no emergency or savings fund?

If you only answered yes to some or all of these questions, you need to realize that you may have some very deep financial problems. Here are some steps you can take to avoid digging yourself a deeper hole:

1. Avoid incurring any more debt. Use cash for most purchases and live within your means.

2. Develop a budget and a plan to get you on better financial footing. Track those expenses and know where the money is going. Develop a plan and stick to it!

3. Consider credit counseling. Most credit counseling agencies can help you for a small fee to develop a budget so that you can pay down your debts. They can also help show you ways to better manage your debts to avoid bankruptcy.

4. Consider bankruptcy as a last resort. Everyone’s life situation is different. Perhaps you’ve lost a job and along with that, your healthcare benefits. Perhaps you are in foreclosure. Dramatic events like this can quickly turn your finances upside down. Contact a reputable lawyer in your area that specializes in bankruptcy for help.

Recognizing that you are in over your head and unable to manage your debt is the first step to making more financially sound decisions. Your goal should be to pull yourself out of that dangerous debt mire and to land safely on the road to financial health and freedom.

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