Signs of Financial Trouble

With up to one in three college students graduating with $10,000 or more in credit card debt, it's clear that credit card debt can be a major - and unexpected - problem for far too many students. In fact, after surveying tens of thousands of first year college students, we've found that most expect to graduate with little or no credit card debt at all. Unfortunately, if students don't consider the possibility that they could find themselves in a bad financial situation, they may not take the steps necessary to prevent a small problem from becoming a major financial crisis.

Obviously, the best way to deal with debt is to avoid it in the first place - get organized, make a financial plan, stick to a budget, and save an emergency fund that can be used for paying off an unexpected bill. But even if you never have a problem with debt, understanding how people find themselves in trouble can be a great way of helping a friend or family member deal with a difficult situation.

For some, major credit card debt happens quickly as the result of a financial emergency - a major medical bill or the loss of a job, for example. But chronic debt rarely happens all at once for most people. Little by little, month after month, their credit card balance increases as the result of unplanned purchases. Sooner or later, they discover it will take months or even years to pay it all off.

Chronic debt usually happens in three stages:

  • Stage 1 - Surprise. People simply spend more than they can afford, and are surprised when they open their credit card bill. They check all charges thinking there's got to be a mistake somewhere, but all charges are correct. If caught in time, chronic debt can be forced into remission at this stage by simply changing spending habits and sticking to a monthly budget.

  • Stage 2 - Denial. In the denial stage, people deny there's a problem for months or even years at the time. They think everything is under control since they are able to make their minimum payments. A credit card company may even raise their credit limit, which some see as an invitation to spend more. The problem is that their total indebtedness continues to rise.

  • Stage 3 - Full Onset. In the final stage of chronic debt, people are unable to maintain debt payments, their accounts are suspended, and their total debt continues to grow because of interest and fees. Interest rates can be well over 30% for those with chronic debt problems, making the payment required to pay off a $10,000 debt nearly $500 per month for three years. Some people may have legal proceedings brought against them and have their wages (current or future) garnished, meaning that their employer is forced to send a portion of their pay to creditors each month.

If left unchecked, all cases of chronic debt have the same result - a person's credit rating is ruined and future attempts to finance a car, home, or to even get a new credit card may be refused. In fact, employment options may even be limited since many employers use credit reports when making hiring decisions.

How can you tell if you are in serious financial trouble? Here are some clues:

  • Your expenses (food, housing, debt payments) are more than your income. As the result, each month leaves you further in debt.
  • You can afford to make only the minimum payments or have to skip payments on your debt because of lack of cash.
  • Your credit card interest rates have been increased because of missed payments, making it difficult to pay even the minimum amount due.
  • You are getting calls from collection agencies.
  • You are using credit cards to pay for items that should be accounted for in your household budget (gas, food, payments to other bills, etc.).
  • You are forced to open additional lines of credit to make ends meet because your existing lines of credit are maxed out.

Many people experience a period of financial stress. Whether you have short-term difficulties or have a problem you've been dealing with for years, there are steps you can take to fix your situation - from creating a personal debt reduction plan to seeking the help of a credit counseling agency. We also offer detailed information on creating a debt reduction plan and choosing a credit counseling agency in the Library.

Another question to consider is whether you may have a spending problem. Compulsive spending is a condition that may require more than "do it yourself" help. You may find our compulsive spending assessment helpful in identifying potentially destructive spending behaviors. Adapted from a Debtors Anonymous checklist, the assessment offers objective feedback on over a dozen key feelings and behaviors that could be a sign of a serious problem.