drowning in debt

Do you know the warning signs of too much debt?

We’re lucky to live in a society in which we can obtain instant cash. Unfortunately, that luck can also turn to misfortune if we have trouble meeting even the minimum repayment obligations.

Many of us carry debt, but how do you know when you have too much debt? These 5 warning signs can help you determine if your financial situation could be heading into trouble:

  1. You are only making minimum payments
    When you borrow money from a parent, sibling, or other family member, chances are they want to be paid back as soon as possible. That way, you keep their respect and avoid awkward silences around the dinner table during family get-togethers.It’s different with banks, private lenders, and credit card companies. Sure, they want their money back but they don’t really mind if you only make the minimum payment every month. That way, they keep you in debt and continue to make money off the interest you owe.When you make a payment towards a loan, the money is applied to the interest and any fees before the principal. By only making the minimum payment, your overall debt begins to balloon and might eventually pop – along with your credit rating. It’s also a strong indication that you’re carrying too much of a debt load.Only paying the minimum on your loans and credit cards might be an easy short-term solution to a cash flow problem, but it will also make matters much worse over time.
  2. Your credit cards and credit lines are at their limit
    When you were younger, you likely watched your parents pay for things with a little plastic card. Without seeing actual paper money being exchanged during the transaction, you might not have appreciated that those groceries will have to be paid for eventually.Sometimes, people carry these “lessons” into adulthood, and still equate credit cards with “free stuff” when they get their own cards. This can lead to credit cards being maxed out, a precarious financial position made even worse when the cardholder has more than one card.The same goes with lines of credit. It might seem like “free money” especially when secured against a home. But once you start dipping into it to pay for vacations, vehicles, other bills, and even everyday expenses, your credit line could be quickly eaten up.If you’re using your credit line to pay off credit cards or other loans because you owe more than you bring in, or are using it to pay for things that offer no return, you may very well be carrying too much debt.
  3. You borrow from payday loan companies
    Payday loans sound great in theory: a quick, short-term loan to get you through to your next paycheque. Companies such as Money Mart® have been providing this service to thousands of Canadians for decades.Typically, people seek out payday loans because their cash flow has dried up between paycheque. They also lack enough savings to help them pay expenses, and have exhausted all other avenues to secure money.The truth is that instant payday loans carry some of the highest interest rates on the market, as well as lending fees as high as 35%! It can become quite a lot of money to pay back in two weeks, and if you ran out of money before you needed the loan, how will you pay it back before it becomes delinquent and spirals out of control?Payday loans should be considered a last resort, and needing one is definitely an indication that your debt load is too high.
  4. You’ve paid the minimum balance on one line of credit by using a second line of credit
    A line of credit secured against your home offers a great opportunity to invest in your property and increase its value. If you can keep up with repayments, you’ll be on your way to sound financial footing once again.But if you can’t keep up, reorganizing your debt and making lifestyle adjustments can eventually put you back on the right track. Taking out a second line of credit to pay off the first isn’t a sound strategy, and could cause your debt situation to worsen.Before you take out that second line of credit to make that minimum payment on the first one, consider this a sign that you already have too much debt, and this move could make it even worse.
  5. You take cash advances on your credit cards that you don’t repay in full within the month
    Cash advances on your credit cards can be a convenient way to quickly pay for things if you’re low on cash. It’s as simple as a cash withdrawal from an ATM with your debit card, right?Not exactly. Withdrawing from an ATM with your credit card, using convenience cheques, or using your credit card for overdraft protection all come with high fees and interest rates. Some credit card companies don’t offer a grace period on cash advances either, so instead of interest being charged at your next billing cycle, it starts piling up right away.If you can’t repay the advance in full, you’re only adding to what is likely an already bad debt situation.

There are a couple of common threads to these signs. One is the question of why you’re only paying the minimum amount on your loans, credit cards, and credit lines. If it’s because the minimum amount is all you can afford, due to other expenses such as rent, food, transportation, or other debt responsibilities, you may be carrying too much debt.

The second is borrowing more to pay off existing debt. This is never a good solution. Not only does it put your future credit rating at risk, it also perpetuates the debt behaviour that might have gotten you into this situation in the first place.

Before you find yourself borrowing more, it’s a good idea to seek out credit counselling that will give you skills to help with debt reduction, introduce debt relief options such as debt consolidation or a consumer proposal, and put you on a path to better financial health.

Don’t worry – there’s a silver lining ahead. As always, I’m here to help you find it.

Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.

For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped people in Toronto with debt reduction management and credit recovery strategies, with the personal service that only an independent licensed insolvency trustee can bring. Contact us today at 416-915-9007 today for a free consultation.

TIP : When debts begin to pile up, you need to find extra money. Borrowing more money to pay off debt could make matters worse, and lead you into a situation where catching up is nearly impossible. There are better ways to find extra money, such as taking on additional part-time work, reorganizing your repayment plan, or simply cutting back on lifestyle frills and extras until your financial picture gets under control.