Are You Ignoring Your Financial Situation?

Are You Ignoring Your Financial Situation?

At any one time, at least one in six of us is in “problem debt”.  But how do you know if this is you? This blog reveals the eight signs of problem debt - and a simple five-step approach to fixing the problem.

8 Signs of Problem Debt

1. You don't know how much you owe and you don't want to find out

Deep down, you’re probably aware that your debts are spiralling out of control, but you’re in denial. As long as you don’t know how much you owe, you can pretend the problem doesn’t exist. If you put credit card statements to one side rather than opening them or you’ve stopped checking your balance online - this could be you.  

2. You’re only paying the minimum repayment amount on your credit cards

Most credit card companies set their minimum monthly repayments at such a low level that if you only pay the minimum, you will never pay off the debt - in fact, it will keep growing. No matter whether your debt is large or small, it’s important to pay as much over the minimum repayment as you can afford. If you can only afford to pay the minimum repayment, this is a sign you’re in problem debt and you should seek debt advice urgently.   

3. You’ve missed payments and are being charged late fees and penalty interest

Even worse than only making the minimum repayment is missing payments. This usually results in late fees and penalty interest being added to your debt, compounding your money woes. Missed payments can also affect your credit rating, making it more difficult for you to borrow money in future. 

4. You’re borrowing from one source of credit to pay for another

Whether you’re borrowing from friends and family to repay a loan, transferring the balance from one credit card to another to stay afloat, or making use of expensive cash advances, this is unsustainable and a sure sign you’ve got into problem debt.   

5. You’re using credit to pay for everyday essentials, like groceries or your electricity bill

If you have to use credit to pay for your groceries, this is a sign that you’re regularly spending more than you earn. Either you’re in problem debt already, or you soon will be. 

6. You’ve spent your savings and now you have nothing in reserve for an emergency

If you’ve drained your savings on servicing your debts and generally trying to make ends meet, this is a clear sign of problem debt.

However, using your savings to pay off debts makes sound financial sense. It doesn’t make sense to have money in the bank earning a low rate of interest while paying a higher rate of interest on your debts.

So if you’ve made a sensible decision to use your savings to pay off your debts, this is a good sign that you’re facing up to your debts and you’ve realised there is a problem.

7. You’re hiding your spending from your partner

If the thought of your partner reading your credit card statement brings you out in a cold sweat, you need to stop and ask yourself why this is. If you have to hide your debt from your partner, chances are you have too much of it and you know it already.

8. Your finances are starting to affect your mental health

Lying awake at night worrying about money? Feeling depressed and anxious? This is a definite sign that your debt has become a debt problem. It’s time to take action.

How to tackle problem debt - 5 steps to freedom

1. Face up to the problem

Taking the first step towards solving your problem debt will be hard because it involves confronting your debts head on. Get together all the information you can find and make a list of all your debts, including the interest rate and how much you owe on each one.

2. Seek debt advice

There’s plenty of free advice out there to help you make a plan to get out of debt. Although most of us are reluctant to seek debt advice, people who have done this say they immediately felt less stressed and anxious as a result.

A debt advisor will treat everything you tell them in confidence and will always be happy to talk to you, no matter how big or small your debt problem is. They may also be able to suggest ways of dealing with your debts that you weren’t aware of.

A great place to start is the National Building Financial Capability Charitable Trust. There is a helpline you can call to speak to a financial mentor, who will help you make a plan to get out of debt. You can also find budgeting services in your local area on the National Building Financial Capability Charitable Trust website.

3. Prioritise your debts and make a plan to pay them off

A debt advisor will be able to help you with this, but a good rule of thumb is to tackle the debt with the highest interest rate first.

It’s important that you don’t miss payments on your other debts though - and if you think you are going to struggle to meet them you should talk to your lender about it. Often they will be happy to agree to a new payment schedule that you can afford.

You might also find Sorted’s debt calculator helpful. This is a handy online tool that allows you to see what your different debts are costing you, and make a plan to pay them off sooner.

4. Stop all unnecessary spending

To clear your debts, you’re going to have to trim your spending back to the bare essentials - and it’s really important not to take on any more debt. Stop all spending on credit cards - and if this is breaking the habit of a lifetime, that is even more reason to do it!

5. Reflect on how you got into debt in the first place

If you’ve followed steps 1 to 4 above, you should now be in a better place financially, making inroads into paying off your debts. And because you’ve put a stop to all unnecessary spending, any bad money habits you had picked up while you were building up the debts should now be broken. 

Now take the time to think about exactly how you got into so much debt. Are there any patterns you can spot? Any behaviours that contributed to the problem?

Once you’ve really understood how the problem arose, you can resolve to do things differently in future, and avoid falling back into debt.

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