Do you have too much debt?


Posted at Jun 16 2008 09:22 AM | Updated as of Jun 16 2008 05:22 PM

By Regina G. Posadas

Owing to a generous spending limit and an attractive rewards program, you probably like flashing and using your credit card. You pay for purchases with plastic rather than cash as often as you can. Naturally, a sizeable balance looms on your account every billing period. It’s likely that you have one or two outstanding loans to settle as well besides the monthly credit card charge. This is okay as long as what’s due stays manageable and you’re able to pay your financial obligations promptly and regularly. But what if you find it difficult to clear what you owe and repeatedly can’t meet the agreed-upon payment schedule?

You could be way over your head in IOUs. Aside from defaults and recurrent late payments, some warning signs that you have excessive debt are:

§ Exhausting your credit limit

§ Paying only the minimum amount due or less each month

§ Taking cash advances from one credit card to make monthly payments on another

§ Taking cash advances or relying on your credit card to cover routine living expenses (groceries, gasoline, utilities)

§ Getting calls from collection agencies or creditors about delinquent accounts

§ Working overtime to sustain your spending

§ Drawing on your savings to cover daily expenses

§ Being denied credit when you apply for another loan

The Better Business Bureau (BBB) reckons you are headed toward a serious debt problem, or are already in the midst of one, if you’ve experienced or are going through any of these situations. And it’s almost certain that you (and/or someone in your family) aren’t using credit responsibly. Additionally, one or more of the following factors may have triggered or exacerbated your problem:

§ Poor money management = spending more than you earn, failing to pay bills on time, living lavishly and beyond your means, resorting to loans for every financial dilemma.

§ Unexpected life events = death of a spouse or another close family member, separation, debilitating health condition and medical expenses, change in employment, relocation.

§ Compulsive behavior = addiction to gambling, drugs, alcohol or other vices.

§ Family miscommunication = financial objectives aren’t clearly defined i.e. only one member saves, the rest spend inconsiderately.

Identifying and understanding the source of the problem together with your weaknesses will help you cope with the crisis more effectively. It is equally essential to convince yourself that by acting on the problem, you can still control your debts, straighten your finances and ultimately have a secure future.

Here are some BBB-recommended steps to manage your debt:

1. Draw up a household budget to figure out your spending patterns. Write down all sources of income and a list of all expenses as well. Pare down discretionary/optional spending (entertainment, restaurants, vacations, travel) particularly if your expenses exceed your income.

2. Don’t add to your debt. Refrain from using your credit card. Deal only in cash as much as possible.

3. Implement daily money-saving strategies. Challenge yourself and other family members to save a little each day in any activity (ex. bring food to work or school, ride public transportation instead of driving, limit cell phone use, etc.)

4. Prioritize debt repayments. Not all loan obligations are created equal. Start with the most expensive revolving types of credit such as credit cards.

5. Negotiate with your creditors. Request for an interest rate reduction or a new payment schedule. Be honest about your situation and paying capacity.

6. Make bigger payments whenever possible to lessen your balance and save on interest fees.

This article is from is MoneySense, the country's first and only personal finance magazine.

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