Most Americans carry debt, and that includes the high-interest debt that comes with credit cards. Finding yourself in credit card debt is severely unfortunate. But how do you even know when things have spiraled to a level that is nearly or totally out of control? GOBankingRates spoke with financial experts to learn five of the key signs you have a serious debt problem — and some steps you can take to fix it.
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If you’re making only the minimum payments due on your credit card every month, you’re throwing money away at a hazardous rate.
“Have you found the lowest monthly payment on your credit cards?” said Shawn Carpenter, chairman and CEO at Stock Alarm. “This is a classic sign that things are looking bad. It’s easy to get caught in this trap, but how can you pay more on that debt and increase your interest rate? It’s crazy.”
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A clear and concerning sign of a serious debt problem is having one or more maxed out credit cards.
“Not only will your credit score suffer, it will also make it harder and more expensive to borrow money,” Carpenter said.
If you notice a significant drop in your credit score, that often indicates a serious debt problem.
“A credit score drop is a big red flag,” Carpenter said. “If it’s because you’re maxing out your cards or missing payments, you’re in troubled waters.”
How you feel in terms of mental health matters, and when a debt problem becomes serious, it can take its toll here.
“If you’re having trouble sleeping at night, are anxious and stressed consistently, or feel your physical or mental health declining because of debt worries, then you likely have a serious debt problem,” said Erika Kullberg, a personal finance expert, an attorney and the founder of Erika.com. “Don’t hide from your debt, even if it’s scary. Tackling it head-on is the best way to take control and lower your stress.”
If you feel held back because of your debt, that’s another key sign of a problem.
“Does your debt get in the way of your personal, professional or financial goals?” Kullberg said. “Can you not afford to buy a home because of credit card debt? Can you not afford to take time off work to pursue higher education because you’re drowning in an expensive car loan? If you can’t reach your goals because of debt, you need to take paying it off more seriously.”
Once you’ve understood that you have a serious debt problem that needs an urgent fix, you must explore the array of potential solutions available to you.
The very first step is acknowledgment and the commitment to tackle the problem.
“Acknowledge there’s a problem and that you are ready to take action,” said Sean Fox, president of debt solutions at Achieve. “It’s important to accept that it will likely require some belt-tightening and other changes in your financial behaviors.”
It’s one thing to say you’re going to get out of debt; it’s quite another thing to actually do it. Eliminating high-interest debt takes time, commitment and a concrete plan.
“You need to do your research and figure out a realistic plan that you can commit to,” Fox said. “Each person will be different. The ‘realistic’ part is important. Many people anxious to work their way out of debt start out by cutting expenses so drastically and/or jumping into a program so quickly that there’s no way they will be able to stick to it.”
To get out of debt, you need to overhaul your budget and aggressively track your spending. Fox pointed out that there are a lot of budgeting apps available that can make budgeting easier.
“If you go that route, make sure you select a budgeting app that connects all financial accounts to give you a unified view of your finances, automatically tracks spending and organizes your finances into categories,” Fox said, adding that you should track your expenses (online and in-person) for a couple of weeks to see just where your money goes.
“Then you can identify areas to cut back and direct the savings to your debt payoff,” Fox said.
If you can’t budget your way out of debt, it’s smart to look into a personal loan.
“A personal loan may offer a rate lower than on your credit cards (or other debts),” Fox said. “The idea is to consolidate your other debts into one with a lower rate, and pay that one personal loan off faster. Interest rates can vary widely, and are generally dependent on your credit profile and scores (people with higher scores qualify for the lowest rates). This is also called a debt consolidation loan.”
You may be able to qualify for a balance transfer credit card. These are great as they enable you to move all your credit card debt onto one card for a low interest rate.
“If you are eligible for one, know that the promotional interest rate is limited, often expiring in six-12 months (sometimes longer, up to 21 months),” Fox said. “You must be able to pay off the balance within that window. In addition, fees can be high, so read the fine print and see if it’s worthwhile for you. Also, understand that each balance transfer card issue has limits on how much debt can be transferred — something that may come into play for an individual with a significant amount of credit card debt.”
Debt management plans, offered by credit counseling firms, are also potential solutions.
“These can lower the interest rate on a credit card by a small amount,” Fox said. “Cardholders can also call their credit card issuers and ask for a lower rate. If you have a good track record of payment, and can explain why you are asking for the lower rate, the card issuer may agree. Assess carefully whether a slightly lower rate may not be enough to really get you out of debt.”
If your debt problem is serious and you can’t dig yourself out of it, heading into debt resolution may be the best move you can make.
“Debt resolution is the process of working on a consumer’s behalf to lower principal balances,” Fox said. “This can be a smart option for someone who is having a hard time making minimum payments, particularly if the reason is that they’ve had a real financial hardship (such as job loss, medical expenses or divorce). Programs are regulated by the Federal Trade Commission.”
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This article originally appeared on GOBankingRates.com: 5 Key Signs You Have a Serious Debt Problem — And How To Fix It
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