Almost everyone has some type of debt, and not all debt is bad debt. Your debt may be completely manageable—or it could be a time bomb waiting to go off. Here’s how to know if you’re in a situation where it might be smart to start investigating debt consolidation loans, debt reduction programs, and other types of debt help.
1. All your money goes toward your debt
If you don’t have any disposable income left at the end of the month after paying toward your debts, you are in a very vulnerable financial position. One small unexpected event—a medical expense, car trouble, job loss, etc.—could force you to rely even more on your credit cards and dig you deeper into debt than you can get out of on your own.
2. You are struggling to afford to even make minimum payments.
Paying the minimum each month can give you a false sense of security. Yes, your credit score is reflecting the fact you are keeping up with payments, but you’re not making much headway in debt reduction. The longer you are in debt, the harder it could be to get out of it.
3. You can’t get new credit
To decide if they’ll extend you credit, a company will usually look at your credit report to calculate your debt-to-income ratio (This equals all your monthly debt payments divided by your gross monthly income). If they think you have too much debt for your income, they may assume you are not capable of paying them back, and won’t approve you. All you can do to improve your situation is to reduce the amount of your debt and/or increase your income.
4. Your savings account is empty (or nearly empty)
To have healthy finances, it’s recommended that you have at least half your yearly income in a savings account, easily accessible should you need it for an unexpected expense. If you don’t have this much, make an effort to save more. If you can’t save more or are pulling from your savings to pay off debt, consider it a sign that you are not on solid financial footing. When an emergency happens, you don’t want to be forced to use high interest credit cards to pay for it.
5. You’re shuffling your credit cards
It can be smart to take advantage of balance transfer offers to move your high interest credit card debt to a lower (or even 0%) credit card. It may help with debt reduction, since you save on interest in the short term, but your debt still exists. And a low promotional rate doesn’t last forever—it goes up after a certain amount of time, and could go as high or higher than the interest rate you had. Then you’re right back where you started. If this is your method of staying one step ahead of your debts, it is not a long term solution.
6. You’re getting debt sick
Are your debts on your mind often during the day, distracting you from being able to focus on work or family? Are they causing you to either lose your appetite or overeat? How are you sleeping lately? When the phone rings, do you dread answering it because it could be a creditor or debt collector? This is no way to live. You deserve happiness, and if your life is being disrupted daily by your debt, it is definitely a sign you should explore finding debt help.
The good news is that there are many types of debt help available—debt consolidation loans and debt negotiation programs like the one Freedom Debt Relief offers are just a couple examples. Only you can decide the right solution for your debt reduction, but the key is to explore your options as soon as you know your debt is a problem.
A good place to start is this debt strategies overview. It offers pros and cons for the most common debt solutions and lets you learn more about each one.