Are You in a Debt Spiral?
A debt spiral is pretty much like a bad nightmare where you’re falling into nothingness and can’t get yourself out of it. Many people go through debt spirals in their lifetime because of unforeseen expenses, loss of a job or medical crisis.
Sometimes it’s by no fault of your own that the debt spiral occurs, and other times it’s because spending habits were out of control. Whatever the reason you find yourself in a debt spiral, it’s time to spend less, make more money – or both.
It may take a while to unravel the tangled mess you find yourself in, but you’re sure to learn more about how to better manage your money and a little bit about yourself, too. The first thing to do if you find yourself deep in debt is to assess your damage.
How much do you owe, to whom do you owe it and what interest rates are you paying? You should assess everything in your litany of debts, but especially focus on consumer debts such as credit cards.
Find the root cause of your financial problems. That can only be done by tracking your spending. You’ll then begin to understand the weak spots of your spending habits and be able to focus on areas where you can cut back.
Most debit and credit card expenditures are easy to track – or you can do it the old way, by saving and adding up receipts. After you know where your money is going you can include the entire family in your plan to cut back.
Don’t cut out everything that the family enjoys, but do include them in the effort to trim some of the fat from your spending habits. If you need more help than a budget plan to cut back on expenses, consider a consolidation loan to reduce your multiple payments to one and to stop the high interest rate you may be experiencing on credit cards.
Being unable to make payments to creditors on time can ruin your credit standing and even lead to harsher measures such as bankruptcy. One signal that you’re in a debt spiral is that you can’t afford to pay your credit cards in full each month.
You keep using your credit cards to purchase necessities such as food and medicine and the creditors add an exorbitant amount of interest to the balance each month. You may even borrow to pay bills – a sure sign you need to sit down and carefully assess your spending and what got you in this predicament in the first place.
Don’t assume that the road will be smooth after you get yourself out of the debt spiral. You have to get to the root of the problem and take steps to keep you from ever having this problem again.
Borrowing from Friends or Family
The general rule of thumb for borrowing from friends and family to reduce your debt is – don’t. You’re likely to get a much better deal from them than getting a loan from a bank or other lending institution, but the risk is personal and may mean inviting an eventual rift between the people involved.
One reason you should never borrow from family or friends is that it’s so tempting to use the money for other purposes than paying off your debt. Going through a bank will ensure that you pay them and they will hound you if you don’t.
There’s also personal risk in getting a loan from someone you care about. The relationship could end up in shambles if you don’t act responsibly to pay off the loan and use the money for other purchases so you’re even deeper in debt than when you got the personal loan.
But if you run out of options and getting a loan from friends or family is your only way out, make sure you have a concrete plan for paying them back as soon as possible. That means creating a budget so you know you’ll have the money when the time comes to pay it back.
A friend may balk at you paying interest on the loan, but you should insist. They could deposit the same amount of money in a bank and earn interest from it – so what you would be getting is actually them forfeiting income so they can help you out.
Insist on paying at least the rate of interest they might earn from a high-yield savings account. And if your friend offers less money than you need, don’t keep asking for more. Graciously accept what they’ve offered and move on. Never negotiate a loan with a friend.
Document your loan. Create a payment plan on paper that outlines the amount and date each payment is due. Make sure you provide the lender with a copy so he knows when to expect your payment(s) and when the loan will be repaid in full.
After you both agree to the terms of the loan, stick to the plan. Never be late and don’t come to your friend with excuses about why you’re going to be late or can’t pay the full amount. This is more than a business transaction – this is a personal relationship that could easily turn sour unless you stick to the plan.
If at all possible, pay off the loan early. Even if you think the friend or family member doesn’t need the money right away, make every effort to improve your financial situation and to pay back the loan as soon as possible.
Make sure you pay it forward in your future dealings. The people who have helped you out of a financial jam may need the favor returned – or there may be someone else in your life that is going through much the same financial problems as you. Offer as much as you can to show your appreciation and your attitude and kindness.
DEBT – A Four Letter Word That Could Ruin Your Life
We all know that too much of a good thing isn’t good for you. Too much debt isn’t good for you either – but neither is too little debt. When you’re in debt to the point that you can’t make payments on time and your credit score tanks, it can make your life miserable.
Some necessities, such as a home in which to live or a car to drive to work and back, may not be available if your credit score is low. If you have no credit at all, these things could also be beyond your grasp.
The best path to follow when it comes to debt is to build your credit so your score is high, but always have the ability to pay cash for anything you might purchase – except for high-dollar items such as a house or car.
Creditors look at credit card debt as bad debt because you’re only required to make a minimum monthly payment on what you owe. You can keep using your card until the balance is maxed out and that looks bad on your credit report.
Think again if you consider credit card debt as good debt because you don’t have to pay for your purchases right away. You could end up spending more than you have the ability to pay back as interest charges are incurred and you get in trouble fast.
When you begin to have trouble paying your bills, you’ll also begin to get notices from creditors for the balances you owe or they might be turned over to debt collectors. You may even become rightly concerned about losing your house or car if you can’t make the payments on time and penalties and interest keep climbing.
Losing your job or meeting a financial crisis such as health problems can turn your financial situation upside down and you may find it an overwhelming task to dig your way out.
Rather than ignoring your situation and letting the debt problems become worse, take steps to get yourself out of the mess by being realistic. Help yourself by cutting unnecessary spending, creating a budget and sticking to it. You may also want to consider debt consolidation or debt relief such as debt settlement or credit counseling.
Bankruptcy may become an option when you’ve tried everything, but still are mired in debt. If you’re experiencing a level of debt and other problems such as loss of a job or medical situation which requires immediate payment, bankruptcy may be the best option.
When you are finally free of debt, it’s time to rebuild your credit. For this, you have to have discipline and never again let yourself be swayed by credit card and loan offers that will simply put you back in debt and keep your life in chaos.
Good Debt and Bad Debt – Know the Difference
Non-consumer loans are classified as good debt and consumer loans are considered to be bad debt. Basically, non-consumer loans fall into the category of offering low interest rates, collateral that will likely increase in value and tax advantages.
Consumer loans are viewed as bad debt because of their high interest rates, no collateral that can be used to secure a loan and no tax advantages. You should know the difference in these two types of debts before attempting to secure a loan and be able to determine which is to your best advantage.
A lender will look closely at your credit card debt and see if you either pay balances every month or pay a minimum payment that incurs high interest charges. Credit cards also offer no advantages such as tax advantages and you’re only required to pay a small percentage of your balance to keep using your card.
Credit cards can become an Achilles’ heel fast and cause you to mire deeper and deeper into debt. Having the ability to spend without paying for something right away is tempting, but can cause each and every item you purchase with a credit card to cost infinitely more than the sticker cost.
It’s almost impossible to live completely debt free. Few people have the money on hand to pay entirely for such purchases as a car, home or private education. That’s why it’s so important that you know the difference between good and bad debt and apply for loans accordingly.
Good debts should be considered an investment that will likely appreciate in value or provide income. Although student loans have gotten a bad rap, they’re considered good debts because a college education boosts your chances of raising your future income.
Another way to think of consumer debt is that it’s held by individuals rather than the government. Household debt is also considered consumer debt and statistically the debt service ratio (DSR) that calculates each household’s debt compared to the total income of the household.
DSR doesn’t include rent or mortgage payments. These payments are calculated with a financial obligations ratio (FOR). Today, most homeowners spend up to 20% of their household income on the mortgage payment.
It’s important to know exactly how much your bad debt totals and pay off these debts as soon as possible. The best way to do that is to formulate a budget and curb your spending habits until you save enough cash to pay off the bad debts.
Your budget should include how much you intend to spend for food, mortgage (or rental) payments and clothing, savings and entertainment. Adhering to a well-thought-out budget plan will help you lower your overall debt.
Life After Debt
Understanding why you fell into the deep chasm of debt in the first place is the first step in resolving your issues with debt and building wealth for the future. Know that getting out from under the stigma of being in overwhelming debt can take years.
During the years of clawing your way out of the stigma of debt, it can be tempting to get back into debt with offers of credit cards and mismanaging your money – once again. Getting in debt again too soon can spiral you into another path of stress and debt that you’re struggling to pay.
You should examine your relationship with debt and begin to analyze why you got into the predicament in the first place. You can begin to manage your debts effectively as you create a budget and follow it to the penny, diagnosing your spending habits along the way.
Credit cards are the main culprit of getting into more debt than you can handle. You can purchase more with credit cards without having to spend the money you have on hand. It feels like having free money.
So during your life after debt, you should only spend with money you have on hand. Purchasing all those good deals on a credit card means you’re actually paying more money than the items originally cost because of the interest rates tacked onto the cost of your purchases for the privilege.
If you do use credit cards after you free yourself from overwhelming debt, make sure you pay them off in full each month to avoid excessive interest charges and to build good credit history.
Prepaid credit cards are good alternatives to other credit cards. You get a certain amount of credit according to the amount you put on it and make purchases that are deducted from that balance.
You can add more money to the card as you pay it down, making it work much like a phone card. Debit cards are also popular for those who want a documented account of their purchases and to help them from spending excessively again. Most banks offer debit cards issued by MasterCard or Visa.
You’ll need to religiously track your spending if you hope to avoid getting back in debt and keep to a budget that is carefully planned. After you track spending for approximately a month, you’ll have a pretty good idea about your expenses and where you can cut back.
Try to create a mindset for building wealth and making sure you’ve saved enough to meet unexpected expenses or loss of income. Besides saving money, research how you can invest your hard-earned dollars to make more money for you.
The Difference Between Consumer and Non-Consumer Debts
It’s imperative that you know the difference between consumer and non-consumer debts and how each may affect your credit and your lifestyle. The difference in the two types of debts lies in the manner they’re treated when it comes to taxes, annual percentage rates, terms of agreement and collateral you may offer.
A non-consumer debt is usually covered by an asset which is expected to appreciate in value, such as a home. The asset acts as collateral for the loan you receive from a lending institution, meaning if you don’t pay back the loan, the lender can sell the property and retain the money received.
APRs (annual percentage rate) are usually much less for non-consumer debts because they’re less risky for the lender. APRs usually coincide with the risk the lender is taking if you fail to pay back the loan and if there is collateral for the loan amount, the risk is minimal.
Interest on most non-consumer debts are usually completely tax deductible and you can take off the amount from your taxes owed each year. Also, most non-consumer debts usually offer a fixed term agreement on the loan, meaning that you have a set time to pay off the debt and can plan better for this fixed amount and timeline.
Consumer debts are usually considered bad debt because you’re purchasing items based on no collateral and can keep adding to the debt and paying the accrued interest. Credit cards are the most common type of consumer debt, but auto loans or other major purchases are also considered loans for general purposes.
The interest on consumer loans is usually not tax deductible and can run up your debts to exorbitant amounts in a hurry because of high interest rates. Sometimes the rates change and can run as high as 30%.
Consumer debts usually have no set time to pay off the amount owed and this is a great situation for the lenders because the rates ensure that you’re paying off the purchases for years and paying them extra in the meantime.
Credit card consumer debt is dangerous to the borrower because it’s not fully understood. Remember that you’re only required to make a minimum payment on your balance (perhaps 2 or 3 percent).
If you have a $1,000 balance on a card at the end of the month, you may only have to pay $10 or $15 in payment. In fact, the interest on those purchases might exceed your payment amount. Make an effort to pay off credit card balances each month to avoid paying high interest rates. Never charge more than you can pay with cash if needed.