Credit Basics
Heed " debt triggers" as a sign you're headed toward trouble
by
Eileen Alt Powell
The Associated Press
May 17, 2004
NEW YORK --
You're fighting with your spouse
over money. Or you're
waking up at night worrying about
the bills. Or you're taking cash advances on one
credit card to pay the minimum due on another.
All are signs of getting too far into debt, credit
counseling experts say. These "debt triggers" should be the cues for consumers to
take stock of where they are financially so they can get spending in check and begin
dealing with debt.
"If more than 15 percent of your take home pay is
going to unsecured debt, you need to take a cold, hard look at your finances," said Howard Dvorkin, president of Consolidated
Credit Counseling Services Inc., a nonprofit
agency in Fort Lauderdale.
Put another way, "if you're making $1,000 a month
after taxes and you're paying out more than $150 in credit card bills, a light should
be going on," Dvorkin said.
A recent survey by the Cambridge Credit Counseling
Service found that more than one-third of consumers pay their credit card bills
in full each month. At the other end of the spectrum, 39 percent paid only the minimum
due, and 3 percent made no payments at all. The rest fell in between.
Failure to pay can result in added late fees, while
paying just the minimum each month can greatly increase the overall cost.
Take a consumer who owes $2,000 on a card that carries
13 percent interest. Pay just the minimum, usually 3 percent of the balance, and
it will take more than 11 years to pay off the debt and cost $1,024 in interest.
Double the payment to a flat $120 a month, and the debt is gone in 11/2 years at
a cost of $218 in interest.
So
what are some of the warning signs that should
give consumers pause?
Kelly McGraw, an adviser at Novadebt, a nonprofit
credit counseling service in Freehold, N.J., said there are different triggers for
different people.
"Some start missing payments and begin getting calls
from collection departments or collection agencies," she said. "Or they try to use their cards in a department store and find they're maxed out."
At that point, McGraw said, some consumers go into
denial and stop opening their statements.
"But you have to open it so you can begin dealing
with it," McGraw said. "It won't go away if you try to ignore it."
McGraw got into trouble with credit card debt in
college and got out of it by working out a budget and repayment plan at Novadebt,
where she works.
"It wasn't painless," she remembers of dealing with
$3,000 in debt. "I cut up the cards and spent more than two years paying it off.
. But I fixed it before it spiraled out of control."
Dvorkin of Consolidated Credit said consumers should
regroup when they find themselves:
Making the minimum payment month after month.
Taking cash advances on one card to pay others.
Putting off trips to the dentist or doctors because
they don't have the money.
Paying bills with money intended for other things,
like utilities or groceries.
Depleting savings to pay current bills.
"Very often it's a life event that gets someone
in trouble," Dvorkin said. Divorce, the birth of a child, buying your first home,
changing jobs -- all result in changed financial circumstances that require spending
adjustments.
"People start slipping off the tightrope, and it's
difficult to get back on," he said. "But it can be done."
