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.
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.