By Tiare Rath, CBS MarketWatch
SAN FRANCISCO (CBS.MW) -- Between the mortgage, the
car payment and the credit card debt, you may feel overwhelmed.
But are you in trouble?
Two credit experts who deal with nothing but debt all
day long can see the signs from a mile away. Obviously,
most people can't pay for a house and car with cash,
so secured debt is usually OK to carry.
It's that credit thing that gets them in trouble. "It's
not a healthy fuel we've got fueling this healthy economy," said
Catherine Williams, who serves as president of Consumer
Credit Counseling Services in Chicago.
Here's what Williams and Debt Counselors of America
President Steve Rhodes say are key warning signs that
you could be in over your head, and the first steps you
should take to turn things around.
- You're talking about it -- a lot.
Notice discussions
at home swerving toward money all of the time? That's
a red flashing light that you could be in trouble. "It's
a sign that there's some discomfort there," Williams
said. Obviously, preoccupation with money takes time
away from other issues, which can hurt relationships
as well.
- You have no cash savings
Everyone's so set on building
their 401 (k) and other retirement plans that they
forget a little step -- cash savings. The problem?
If the boom goes bust and your job becomes a thing
of the past, you're stuck: a) withdrawing from your
retirement accounts and getting penalized; b) charging
up a storm on credit cards because you don't have the
cash to survive; or c) defaulting on loan payments.
None paints a pretty picture.
- Your card is your best friend
You use it everywhere -- the grocery store, the
department store, the video rental shop. Problem
is, if you're like two-thirds of Americans, you
don't pay the balance off every month. If you're
using credit cards to pay for items you used to purchase
with cash, it could be a troubling sign. By using
credit cards instead of cash, checks or debit cards,
it's easier to go over budget, Williams said.
-
You
don't know how much you owe
Let's see, there's the two Visa bills, the Mastercard,
the Macy's card, the car loan payments. Credit experts
call it "spreading the joy," because it's difficult
to keep track of debts when they're scattered
all over. Adding it all up can be scary because
you'd be slapped with reality, but it's a healthy
start. (If it makes you feel better, the worst
credit card debt on record was 35 cards accounting
for $386,000 in debt.)
-
You're scraping by
If you've got the mortgage and the car loan paid
for the month and you can only handle the minimum
on your credit card, "you're just inches away from
trouble," Rhodes said. You probably don't have
an emergency fund, and you're not paying off
unsecured debt efficiently.
-
More than two cards
are maxed out
Two cards full of debt isn't a good sign, credit
experts said. Another rule of thumb is that you should
be able to pay off all of your unsecured debt in
under three years. "And that's really being generous," Williams
said.
-
You take cash advances
Cash advances from credit cards can be dicey,
especially if you're using them to pay the balances
on other cards, Rhodes said. Try to avoid cash
advances whenever possible.
-
You have no spending
plan
This goes along the lines of not knowing how much
debt you owe. If you haven't written
down how much money you spend or owe, you'll end
up spending when you feel like it. This causes
overspending, credit counselors said.
-
Your percentages
are tweaked
The general rule of thumb is that up to 20 percent
of your takehome pay can go to paying
unsecured credit -- including your car payment,
Williams advised. Twenty-eight to 33 percent of
your after-tax income should go to housing. If
your housing payments are higher, you could go
farther into debt, pushing that 20 percent target.
If you're beyond 20 percent for unsecured debt
without high home payments, you're in trouble.
Now
that you know the signs, here are the first
steps to alleviating some of the debt's weight off
of your shoulders. Your card is your best friend
You use it everywhere -- the grocery store, the department
store, the video rental shop. Problem is, if you're like
two-thirds of Americans, you don't pay the balance off
every month. If you're using credit cards to pay for
items you used to purchase with cash, it could be a troubling
sign. By using credit cards instead of cash, checks or
debit cards, it's easier to go over budget, Williams
said.
You don't know how much you owe
Let's see, there's the two Visa bills, the Mastercard,
the Macy's card, the car loan payments. Credit experts
call it "spreading the joy," because it's difficult to
keep track of debts when they're scattered all over.
Adding it all up can be scary because you'd be slapped
with reality, but it's a healthy start. (If it makes
you feel better, the worst credit card debt on record
was 35 cards accounting for $386,000 in debt.)
You're scraping by
If you've got the mortgage and the car loan paid for
the month and you can only handle the minimum on your
credit card, "you're just inches away from trouble," Rhodes
said. You probably don't have an emergency fund, and
you're not paying off unsecured debt efficiently.
More than two cards are maxed out
Two cards full of debt isn't a good sign, credit experts
said. Another rule of thumb is that you should be able
to pay off all of your unsecured debt in under three
years. "And that's really being generous," Williams said.
You take cash advances
Cash advances from credit cards can be dicey, especially
if you're using them to pay the balances on other cards,
Rhodes said. Try to avoid cash advances whenever possible.
You have no spending plan
This goes along the lines of not knowing how much debt
you owe. If you haven't written down how much money you
spend or owe, you'll end up spending when you feel like
it. This causes overspending, credit counselors said.
Your percentages are tweaked
The general rule of thumb is that up to 20 percent of
your takehome pay can go to paying unsecured credit --
including your car payment, Williams advised. Twenty-eight
to 33 percent of your after-tax income should go to housing.
If your housing payments are higher, you could go farther
into debt, pushing that 20 percent target. If you're
beyond 20 percent for unsecured debt without high home
payments, you're in trouble.
Now that you know the signs, here are the first steps
to alleviating some of the debt's weight off of your
shoulders.
Lean on Friends
There's nothing like a good friend who can tell you
about struggling to fight off debt. Find someone who
successfully got out of trouble find out how s/he did
it. Bring a pen and paper.
Beef up cash savings Six months' worth of income in
cash is a good safety net. Make it a
priority to start that emergency fund. "When you need it, you need to get to
it," Rhodes said.
Cut 'em up Say good-bye to every credit card. If you
keep them on hand, "you can rationalize, 'well, I can
always use it for an emergency,"' Williams said. But
if you've got a spending or credit problem, you tend
to justify many "emergencies" -- the sale at Bed, Bath & Beyond,
the "cheap" new laptop.
Get counseling
Credit counseling is free through many venues, including
Consumer Credit Counseling Services, and won't go on
your record unless you go into a debt management program.
The good news is 75 percent of people seeking help don't
need the debt management program, but most need a spending
plan.
Read The Web has many great resources, as do public
libraries. Rhodes also advocated one of his non-profit
organization's publications -Five Easy Ways to Get Out
of Debt.
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