How to Overcome Debt Problems

PUBLISHED Oct 28, 2022, 1:06:29 AM        SHARE

imgOwen Rust

Few things are more complicated and controversial than debt. But some debt, such as mortgage debt or student loan debt, is very common. When we talk about debt problems, we often mean credit card debt.

Credit Card Warning

Credit cards are very popular, and are offered to just about everyone. Unlike a debit card, which is linked directly to your checking account at a bank, a credit card actually pays for stuff using the credit card company's money. As the user, you have to pay the credit card company back at the end of each month for everything you bought using the card. If you pay the entire amount back on time, you do not owe any additional interest, fees, or other penalties.

Unfortunately, many credit card users get into trouble because most credit cards allow users to continue to use the card without paying the full amount due every month. Users can make a minimum monthly payment and have their credit limit restored to its usual monthly amount. Of course, they now owe a high rate of interest on the amount that has been unpaid! Only having to make a minimum monthly payment can result in several months of debt accumulation. Before users realize the damage, they have generated thousands of dollars in debt.

Some credit cards offer high monthly credit limits that may exceed the entire monthly income of the user. This makes it easy for people to get into credit card debt, as they are not limited by their income. And, with credit card interest today averaging 22 percent, even minor debts can be difficult to pay down. Debtors (those in debt) must first pay off the interest owed before they can pay off the principal (dollar amount of borrowed money).

Five Warning Signs of Financial Trouble

One warning sign of trouble is not being able to pay your credit card statement in full each month. This will cause debt to accumulate each month. Sometimes, users choose to pay only the minimum amount and vow to pay off both monthly statements in full next time. Unfortunately, the planned major increase in income rarely works out, forcing users to continue paying only the minimum amount. This results in growing credit card debt that can be extremely hard to get out of.

A second warning sign is spending more than you earn. Credit cards and loans make this possible, and it is easy for people to spend more than their income and rationalize it as a one-time "expensive month." However, the "expensive months" keep on happening! Failing to draw a hard line at overspending can lead to overspending becoming commonplace, resulting in debt.

Third, you don't have any savings. Sadly, it is not uncommon today for Americans to be living paycheck-to-paycheck, meaning they spend all of their income each month. The lack of savings can result in expensive debt, usually credit card debt, if an emergency situation occurs. For example, not having $1,000 in savings to cover an emergency would result in someone having to take out a payday loan to pay for auto repairs. These loans, similar to credit cards, have very high interest rates. To avoid high interest on repair and emergency costs, it is important to have some savings for those situations.

Next, you are borrowing money to pay your monthly bills. Bills like utilities (electricity, water, natural gas, Internet service) are a necessity and can be shut off for nonpayment. If your income cannot pay these necessities, you are likely in financial trouble. Unlike other purchases, utilities are recurring expenses that must be paid every month, so paying for them with borrowed money will increase your debt each month. It is important to ensure that you can pay all your monthly bills in cash, meaning money you possess that is not borrowed!

Finally, a sign of financial trouble is when your spending or debt starts affecting your personal life. Even small amounts of debt can cause stress in relationships, especially if it requires making cuts to important expenses. Having to avoid outings and activities with friends and family due to financial problems can lead to feelings of guilt, anger, and isolation. Therefore, financial health also helps maintain one's mental health.

Early Warning Signs of Personal Debt Trouble

One early warning sign of debt trouble is overspending. This can occur easily if you do not budget your spending. Those who plan their spending and track their expenses are better prepared to avoid overspending, as overspending often occurs accidentally. After accounting for monthly fixed payments and utilities, budgeters know how much money they have left for day-to-day purchases. Some of these, such as groceries, can be estimated each month. As spending approaches the estimated monthly limit, budgeters know that they should try to cut back.

A second early warning sign of trouble is being denied credit, usually a loan. This can catch some people by surprise, as they might have never checked their credit score before. Fortunately, Sensei Credit helps people track their credit score and credit reports to ensure that they are credit worthy. Failure to pay a bill in full or on time can result in a negative credit report, which lowers your credit score. Ideally, you want a credit score of 700 or higher. If you discover that you have a credit score below 700, you may struggle to get a home or auto loan at a favorable interest rate.

Third, avoiding the topics of finance, budgeting, and saving may be an early warning sign of trouble. Subconsciously, you may realize that you expenses are now greater than your income. Even if you have not "crunched the numbers," you may feel distressed as part of you realizes that your expenses are unmanageable. Do not ignore these gut feelings! It is time to tackle the problem head-on.

Help With Debt Problems

To fix debt problems, you must first know the extent of the problem. You need to collect all of your financial statements and determine how much money is owed, then compare it to your income. You will need to create a budget to determine how much you can spend on living expenses. With what is left over, known as discretionary income, you can decide how much you can pay each month toward your debt. You may need to adjust your budget so that the amount you pay toward servicing your debt is greater than the minimum amount. Otherwise, you will not actually be reducing the principal of your debt.

The Debt Snowball

Once you are able to put money each month toward paying down debt, you should begin with paying down the principal of the smallest debt first - meaning you have to pay more than the minimum payment. Once this debt is paid off, you can allocate its monthly payment toward your next largest debt. Thus, your ability to repay debt "snowballs" over time and helps you tackle larger and larger debts. This process builds confidence and positive financial habits.

Refinance Debt

One strategy for paying down debt is to refinance it. This means taking out a new loan at a lower interest rate to pay off the original loan. Unfortunately, the ability to refinance may only be available after you have improved your credit score and gained eligibility for a lower interest loan. During economic slowdowns, such as a recession, interest rates often fall, also providing a good time to refinance debt. Some credit card companies or lenders may also agree to lower your interest rate if you negotiate with them.

Monitor Credit

To refinance your debt under favorable terms, you need to have good credit. Monitoring credit helps ensure that your credit score is optimal by catching and removing any errors on your credit reports. Sensei Credit ensures that your credit score is not being dragged down by fraud or erroneous charges. Credit monitoring can also reveal that you have lines or credit that you have since forgotten about, such as an old credit card from a retailer. Your credit score may be low because you have too many lines of credit from old, unused credit cards.

Helping Someone in Debt

If someone you know is struggling with debt, you can help them by offering them resources to explore credit monitoring, debt refinancing, the debt snowball strategy, and budgeting. Some people who are struggling with debt may feel hopeless and not know where to begin. Due to a lack of personal financial literacy education in schools, many Americans may get into debt before they know about credit scores and how to properly budget!

Why We Need to Manage Debt

Everyone needs debt at some point. From cars to houses to higher education, there are many expenses that we cannot pay in cash. They must be financed with borrowed money. This affects our credit score and credit worthiness, so we need to be knowledgeable and vigilant about our credit. Sensei Credit can help ensure that we are at our credit worthy best for all of our borrowing needs!

Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
What is Insurance? And How do I Get Affordable Insurance?

Insurance coverage is a funny thing. Everyone seems to have some sort of idea what it is, most think they need it but not urgently, everyone has it for their car, and some have way too much.

What are I Bonds & How do they work?

Series I Savings Bonds (also known as I Bonds) are a type of bond offered by the US government designed to keep pace with inflation.

STAG Industrial: Perfect Time to Buy This 5% Yielding, Monthly Dividend Paying REIT?

Who is STAG Industrial? STAG is a Real Estate Investment Trust (REIT) that specializes in acquiring and managing industrial properties throughout the United States

Dividend Kings In Focus: Kimberly-Clark

Kimberly-Clark (KMB) increased its dividend for the 50th consecutive year at the start of 2022. As a result, it has joined the list of Dividend Kings.

What is a 401(K)?

When you enter the working world or change your job, one of your first matters of business is setting up a retirement such as a 401(k) plan. But what exactly is a 401(k)? Let’s explore the answers to some common questions.

US Economy Is Set To Rebound In Thursday’s Q3 GDP Report

Economic activity for the US for the third quarter is on track to recover in this week’s initial estimate from the government, based on the median for a set of estimates compiled by CapitalSpectator.com

Is BBY A Buy or Sell? Is Best Buy still the Best Buy For Investors?

On one side, the end of the pandemic revived many businesses to the pre-Covid situation; it has negatively affected the growth of other companies. BBY is one of those businesses affected negatively.

How To Pick Stocks; The Professional Way

An Offer To Write a Series of Articles

What Effected The Market This Week

Stock Market Commentary

Greenback Holds Above JPY150, while BOJ goes MIA

The continued surge in US rates and inability of the equity market to sustain gains saw the post-Truss sterling rally unwind amid a broader recovery of the dollar.

Federal Realty (FRT): A Dividend King REIT

The overall Real Estate Investment Trust (REIT) sector has been down a lot year to date.

Why Can’t You Screenshot NFTs?

Are NFTs simply not pictures? Why can't we just make screenshots? Find out more in this article.

Investing in NFTs: Can You Buy NFTs in your Self-Directed IRA?

Although traditional investment options still exist in the stock market, there are many more new types of investments being utilized. One of these new investment options is Non-Fungible Tokens (or NFTs) which are quickly emerging as an investment choice for many investors.

Managing Your Debt and Your Savings

One of the best ways to invest in yourself is to "Pay Yourself First!”. The second best investment is reducing your debt

The Top Electric Utility Companies Ranked Best to Worst

Electric utilities are a great way to add dividend income to your portfolio. We rank them by the best income investments during these volatile times.

Concealing Volatility

Part of my career was based on concealing volatility. I sold Guaranteed Investment Contracts. I helped design and manage several different types of stable value funds. Life insurance contracts get valued at their book value, regardless of what the replacement cost of an equivalent contract would be like presently.

How Soft and Hard Credit Pulls Affect Your Credit

It's practical to learn how to establish credit for your business. However, before you start applying for loans, weigh the costs as well as the impact on your business.

Money Scripts - How we Feel About Money

Ever thought about how you feel about money? Believe it or not, the way you think about money has a significant effect on your ability to grow and build wealth.

9 Quick Cash Advance Apps To Get You Money Now

A cash advance app is a type of financial application that allows users to request and receive money, typically within 24 hours. Many cash advance apps are available on the market, each with its unique features and benefits. Some popular cash advance apps include Brigit, Dave, Earnin, Chime, and Moneylion.

These Are The 5 Best Retirement Gifts For Women

When a person retires, giving them a gift to celebrate the occasion is a common practice. However, choosing an appropriate present isn’t always easy. If you aren’t sure where to begin, here are five of the best retirement gifts for women.

Resources for Publishers
Resources for New Investors

Boosted with BossCoin