Do I Have a Debt Problem?

The following signs will help you determine whether or not you have a debt problem:

Over the Limit

Many credit cards charge fees for spending over your credit limit. This will make this month's balance larger than last month's. If all of your credit card balances are greater than 80 percent of your credit limits, consider this a danger signal.

Too Many Cards/Too Much Debt

As a general rule of thumb, you either have too many credit cards or you are carrying too much debt if it seems you cannot pay off your combined credit card debt within one year. When was the last time you had a zero balance on your credit cards?

Out of Money

Many people are using credit for small purchases such as gas and food. If you previously paid cash for these or other small items, but are now using credit, it could be a sign that there's a problem.

High Debt-to-Income Ratio

Your debt-to-income ratio measures the amount of debt you have against your income. You can calculate this ratio by dividing your total monthly debt payment (excluding mortgage/rent) by your total monthly gross income (before taxes). For example, $500 in total monthly debt payments divided by $2,000 in monthly gross income results in a debt-to-income ratio of 25 percent. If you have a debt-to-income ratio near or over 20 percent, this is a sign that you may have a debt problem.

Emergencies

It's a fact. Crises and emergency situations happen, and people sometimes are unable to pay for such things as emergency auto repairs or medical expenses because their credit cards are tapped or the majority of their earnings are applied toward debt repayments. It's always important to keep an open line of credit available for such situations.

Minimum Payments

What many people don't realize about revolving credit card bills is that making only the minimum payment-or less-can take 12 to 15 years to repay. Making only the minimum payment means you are not applying any significant amount toward the principal. If you're making only the minimum payments on your credit cards every month, you may be overextended and in need of putting together a spending plan.

Using Your Credit to Make Payments on Other Cards

Taking cash advances to pay bills is not a solution for paying off debts. Paying one credit card with another line of credit actually creates more debt. In addition to the amount equivalent to the original debt, you will be faced with any cash advance fees and interest from that new line of credit.

Balance Transfers

Many creditors offer new credit cards with balance transfers available at low interest rates for an introductory period. It's important to remember, though, that after the introductory period the interest rates typically skyrocket to 19 percent or more. Additionally, an increasing number of credit cards are charging fees for transferring balances. If you keep switching credit card balances, you may have a problem managing your finances.

Skipping Payments

Are you late paying your mortgage, rent, car loan, or utility bills more than once per year? If you juggle bills and skip payments, this is a definite sign that you have a debt problem.

Borrowing Money

If friends and relatives are constantly giving you money and you're still short on your bills, credit counseling can help you learn how to budget or put you on a plan for paying off your debts. If you refinance your debts before they're paid off, you'll likely be subject to administrative fees and higher interest rates from lenders.

Debt Consolidation Loans

Are you borrowing from a new source to pay off an old debt? Many people who do so obtain debt consolidation loans to pay off all their existing bills. However, once the bills are paid off, some people wind up charging on their credit cards again. This means having to pay back the loan plus the new credit card charges, which drives people needlessly into further debt.

Unsure of the Amount Owed

Many people have no idea how much debt they carry on a monthly basis. If you keep using credit cards and are not tracking your spending, your financial situation could get out of control quickly.