One of the things people don’t often realize about credit counseling is that you don’t have to wait until you’re in trouble to come in for help. A pre-emptive strike, so to speak, can help people to see they are headed for trouble, and to turn things around before they fall into the hole.
We’ve discussed in earlier blogs the DTI, or Debt-to-Income ratio. Being aware of this number and keeping track of it can really help people to be aware of their debt load and to keep the borrowing under control. For a refresher, the DTI should not be more than 20%. In other words, no more than 20% of your net (a.k.a. take home) income should be going to debt payments. This includes car payments, bank loans, student loans, credit cards, basically any debt other than a mortgage. If your debt payments take more than that 20%, it’s time to focus on debt repayment.
So what are some other danger signs? Let’s list off a few.
Having to use credit to “close the gap” is one red flag. What that means is there isn’t enough money to cover normal expenses, and so you have to put regular monthly expenses on credit. This is especially problematic if it is a new situation. If you had been doing okay before, and all of a sudden you can’t get from paycheck to paycheck, it’s time to look back and see what happened. Is there a new or unexpected expense? Is there an income loss? Did you take on a new payment? Is it a temporary situation like a car repair, or is it just trying to get from one paycheck to the next? If it isn’t a one time thing, it’s time to take a hard look and spending and income.
Another red flag is using credit to pay debt, in other words, moving debt from one account to another, but never really paying anything down. This would be something like putting a loan payment on a credit card, or making a payment on a credit card, but then having to use up that available credit right away, because you can’t get by. This is a loop you can get stuck in where you can’t make any progress paying down your debt, and that available credit goes down each month as interest accumulates.
One more that can bury you financially pretty quickly is opening new accounts because you are maxed out on your current accounts. This is a dangerous behavior, because it only adds to the problem by adding more debt as well as an additional payment to make. It’s a very short term answer to a long term problem, and eventually it piles up to the point that you can’t make the payments and you can’t get more credit. The majority of clients I’ve had in this situation have ended up in bankruptcy.
So, do any of these apply to you? Are you in a position where you are tempted to do one of these red flag behaviors?
If you haven’t yet fallen down into the financial abyss, but are moving toward the edge of the hole, come in for some help. Our counselors can help you to find your options, and help you to get going in a better direction.
Contact us at 1-888-258-2227 or go to www.LssSD.org to make an appointment.
Written by Sylvia Selgestad, Financial Counselor and Educator
Photo credit: nicolecrank.com
LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus | Financial Fitness Education
705 East 41st Street, Suite 100 | Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities