Early Warning Signs of Debt Trouble

Last Updated Jun 9, 2010 4:45 PM EDT

Are you in debt trouble? As bankruptcies soar into record levels, debt and credit experts maintain that the biggest problem is that consumers miss the early warning signs of pending economic crisis. By the time consumers realize they're in trouble with credit or debt, they've dug a hole so deep that there's nothing anyone can do to save them from bankruptcy.

If you want to keep yourself from teetering over the financial edge, learn the five early warnings of debt trouble, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.

They are:

  • Using credit to buy essentials. It's one thing to use your rewards card to buy groceries when you're paying you bill in full each month. It's quite another --and a sign of distress -- if you're using the credit card to buy groceries, gas or pay your rent when you don't have a plan to repay the debt within 90 days.
  • Credit card balances exceeding 10% of income. If you earn $50,000, carrying more than $5,000 on a revolving credit card could hamper your ability to respond well to a financial crisis, says Jones. This isn't terminal in itself, but combined with other warning signs, it tells you that you need to start reducing that balance in a hurry. (Incidentally, this is different than having minimum payments exceeding 10% of income, credit experts note. With minimum payments this high, your total debt would exceed your income. That's not an early warning. That's a glaring red sign that says "Get into a credit counselor NOW.")
  • No cushion. You should have between three and six months worth of living expenses in an emergency fund. Having nothing or considerably less means you're either just getting started or are flirting with trouble.
  • Making minimums. If you can only make the minimum payments on your credit cards, worry. Unless this is a temporary situation -- just making the minimums while paying off a medical bill or while between jobs -- you're teetering.
  • Disruption danger. Have you thought through what would happen if your employer suddenly stopped giving you overtime assignments; put you on a temporary furlough or you lost your job? What about if you had a significant car repair or medical issue? Anyone could be in trouble if these problems were big enough or lasting. But if they would put immediate stress on your financial life, you're playing your finances too close to the edge.
If only one of these apply, you are not in immediate danger but still need to push toward building savings and paying off debt. If you're facing more than two of these risks, get into a credit counselor and get help before it's too late.

To find a non-profit credit counseling agency near you, go to either www.aiccca.org or nfcc.org. Both organizations have a buttons on their web sites that help you find a credit counselor.