Wednesday, December 7, 2005

Early Warning Signs of Personal Debt Trouble

Early Warning Signs of Personal Debt Trouble

Personal debt is worrisome for many Americans, whether they owe money for a car, home, education or medical bills. Managing money effectively is often stressful and difficult. To keep your personal debt from spiraling out of control, be aware of your own financial weaknesses and watch out for warning signs that can eventually spell disaster.

Credit Cards

    Credit cards are useful but can become a huge financial pitfall.
    Credit cards are useful but can become a huge financial pitfall.

    Credit cards are a good way to build credit and earn rewards and they're useful in financial emergencies. However, if you're relying on a credit card or cards every month to pay bills, make car payments or buy groceries, you could be headed for trouble. Needing credit cards to get by means you are (and probably have been) living beyond your means, which will almost certainly spell trouble in the future. Living off of credit is not sustainable over the long haul.

No contingency plan or savings

    Not having a financial contingency plan is asking for trouble.
    Not having a financial contingency plan is asking for trouble.

    Being money-smart doesn't just mean staying out of debt, it also means being prepared for it. Focus your efforts on saving a reasonable percentage of your monthly income in preparation for unexpected expenses, such as a major surgery, a job loss or auto repairs. Although major incidents are likely to create a significant financial speed bump for anyone, you should be concerned if the occurrence of one of these incidents right now would seriously disrupt your financial situation.

Financial Ignorance

    Know what you owe to avoid a potential financial mess.
    Know what you owe to avoid a potential financial mess.

    Not knowing exactly how much you owe and to whom is a good way to deepen your financial hole. Confronting the reality of debt, particularly excessive debt, is daunting and stressful, but once you're informed you'll be able to create a plan for getting out of debt and staying there. To keep tabs on your debts, consider subscribing to a credit report-monitoring service, which provide a snapshot of your credit history and alerts when new debts and creditors are added.

Minimum Monthly Payments

    Pay debts faster by making more than the required minimum payment.
    Pay debts faster by making more than the required minimum payment.

    According to Kiplinger.com, debtors who make only the minimum required payment every month cause their debt to extend as much as an extra 10 years. In fact, it's possible to spend almost 20 years paying off a debt as small as $1,000 if you're making a 2 percent minimum monthly payment. Many consumers don't realize that by paying only the minimum amount, they're spending a lot of money on interest and comparatively little on the actual debt. Moreover, if your lender raises your minimum payment and you can't afford the new amount, you risk accruing late fees and penalty charges that only exacerbate the situation.

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