February 19, 2014 – By By Claes Bell and Boston.com Staff
While the overall financial situation has recently improved in the United States, many Americans are still facing tough personal financial circumstances.
“Let’s face it, everyone has good intentions when it comes to their personal finances, but sometimes we get off track. It is so important to be able to recognize the signs leading up to a personal financial disaster,” said Steve Trumble, president and chief executive of national nonprofit American Consumer Credit Counseling. “You can avoid a financial catastrophe by getting back on track before it’s too late.”
Here’s how to tell whether you may be in trouble.
Not Paying Your Bills on Time
Although it may seem like no big deal, failing to pay your bills on time hints at larger problems, according to American Consumer Credit Counseling.
Paying bills late leads to extra charges like late fees, and can deflate your credit score. Also, some student loan lenders and credit companies will increase your interest rate after one late payment.
Struggling to Make Minimum Payments
Minimum monthly payments are typically about two percent of the account balance and in most cases, the minimum payment goes toward interest not principal, American Consumer Credit Counseling said. Moreover, if you’re struggling to make the minimum monthly payment, you probably have way more debt than you can handle.
If you fail to make the minimum payment for more than 60 days, your rate could jump, making your financial condition even worse. While card holders can stave off trouble temporarily by making the minimum payments or shifting balances to new cards, any kind of sudden change in your finances, such as a rise in gas prices, can destabilize your finances, said Jessica Cecere, South Florida regional president for CredAbility, a nonprofit credit counseling agency.
Making Payments Using Credit Cards
When you use your credit card to make payments on other bills, you are playing a high-risk game, American Consumer Credit Counseling said. You’re not only paying bills with money that you don’t have, you will end up paying more in the end because of the interest you accrue from your credit card company.
Taking Cash Advances Out On Your Credit Cards
While it may seem like an easy way to get fast cash, taking out a cash advance on your credit cards is a bad idea, American Consumer Credit Counseling said.
First, cash advances on your credit card usually come with a transaction fee. In addition, cash advances are usually subject to significantly higher interest rates than ordinary credit card transactions and are not included in interest-free periods.
Reaching or Going Beyond the Limit on Your Credit Cards
Did you know that your credit score is partially calculated by comparing your total balance to your credit limit? Accordingly, being at or over the limit on your credit cards will do a number on your credit and could cause you to be denied loans or other lines of credit, American Consumer Credit Counseling said.
Getting Refused For Credit
Being refused credit is a red flag that you may be on the verge of a personal finance emergency, American Consumer Credit Counseling said. Credit card companies are almost always eager to attract new customers. If you are denied it probably means that your credit score is so low that the company perceives you as a risk.
Spending More Than You Earn
We all know that we should be saving a little each month and there is no way you can save if you are spending more than you earn. Being in the red month after month is very stressful and can cause major financial problems, American Consumer Credit Counseling said.
Dipping Into Savings Or Retirement
People dip into their saving and retirement for a number of reasons ranging from medical expenses to mortgage loan distress, said American Consumer Credit Counseling. While pulling from savings and retirement may seem like a good option in the short-term, the long-term impacts can be devastating.
Frank Boucher, principal of Boucher Financial Planning Services in Reston, Va., said “401(k) loans are usually a bad idea under any circumstances, but when you have more than one, that’s a sign that you’re not managing your cash flow very well.”
Regularly pillaging your retirement savings could have serious consequences for your retirement. It lessens the beneficial effects of compounding that help retirement funds grow.
Paying Late Fees
Boucher said habitually running up late fees typically has one of two causes.
“If you’re paying late because you can’t pay on time, that’s a clear indicator (of future financial trouble),” Boucher says. “If you’re paying late fees because you’re just lazy about it, you’re throwing money away.”
A more serious symptom of financial distress is juggling monthly bills by making payments big enough and frequently enough to keep services flowing, but never paying balances on time and in full, Cecere said. Your debt worsens every month as balances grow.
“You’re thinking ahead of time, ‘I don’t really have enough money to pay my bills,’ and you’re sort of living paycheck to paycheck,” she said.
Counting on a Future Windfall
Basing your plans for financial stability on a future payoff, such as an inheritance, a run-up in the value of your home, or a big tax refund can put your finances in dire straits.
It’s also a symptom of a bigger problem—rationalizing when it comes to your debt, Boucher said.
“You’re planning on a bonus that doesn’t materialize, or what we saw happening not too long ago, with people saying, ‘I can always suck more equity out of my property,’” he said. “If you think like that, you’re really setting yourself up for a fall.”
Multiple Credit Card Hocus-pocus
Credit cards are best used as a convenient way to make purchases without having to carry cash and to earn rewards, said Cecere.
“If you’re a savvy consumer and you can use credit cards and you can get points for them … then you’re charging groceries and gas, but you’re paying for them at the end of the month,” she said.
Fighting With Your Partner Over Finances
Most couples have occasional fights about debt, but if you regularly fight with your spouse about money, it can be a sign there’s not enough disposable income to finance the family’s spending, Boucher said. Likewise, Cecere said if you’re regularly suffering from stress over heavy debts, it could be an indication that your financial situation is unsustainable.
It is important to listen to your better half’s position and reflect to determine if what they’re saying is true. Does your partner think you spend too much? Do you? Additionally, having an exorbitant amount of debt can definitely add to the finance arguments, American Consumer Credit Counseling said.
One of the easiest ways to alleviate the situation is to work together to tackle the debt.
“It’s on your mind, but you don’t want to talk about it. You can’t sleep at night because you’re worried about your bills,” Cecere said.
If that description sounds familiar, Cecere said it might be time to seek a free, nonprofit credit counseling service.
Regularly Paying Overdraft Fees
If you’re constantly incurring fees for overdrawing your checking account, you could be on the brink of financial disaster, said Wayne Blanchard, senior partner at Money Professionals Group in Orlando, Fla.
He compares non-sufficient fund fees to the nautical flags raised to warn of dangerous wind conditions.
“If you’re getting a lot of [non-sufficient fund fees] notices, that’s a hurricane warning flag. It’s here,” Blanchard said. “That’s not a warning, that’s a real problem here now.”
Regular overdraft fees can occur for a couple of reasons, said Blanchard. Many serial “overdrafters” are struggling financially and don’t have income available to cover their debts, meaning they’re likely on the verge of having to declare bankruptcy.
You Have A Savings Rate Of Zero
If you’re unable to set aside a small amount of money for savings in your budget, your finances are on unstable footing, Boucher said. “Savings is an expense, and it’s something that should be budgeted for just like any other expense,” Boucher said.
“What’s going to happen is something is going to come along — an unexpected car repair or a home repair or an interruption in income — and you’re going to be in a very bad place.”
He said that while saving may be difficult, not saving puts you at risk of financial hardship. “With no savings, you’re really standing on the edge of a cliff,” he said.
Blanchard agreed. He said many people rely on credit for their emergency backstop, but credit isn’t effective as an emergency savings fund. If banks see you regularly adding abnormally high charges, they’ll clamp down on your limit.
You need to set aside money for unexpected emergencies and for your future retirement, he said.
Treating Your Home Like A Piggy Bank
Using your home equity as a financial crutch is something Boucher often sees with clients heading toward financial distress.
Boucher said such moves are especially ominous if they’re not due to a serious financial need but to a desire for “wants” like a vacation or a new car.
“You’re paying for a vacation with a home equity loan and you’re amortizing that over 15 or 20 years. That just doesn’t make any sense,” Boucher said.