« »

Tuesday, August 14, 2012

Debt management warning signs

Lower credit scores tend to increase credit costs
Oversized debt in proportion to income is a serious financial obstacle

Increased debt burden often has the capacity to magnify financial stain on household budgets. Tackling that increased debt before it gets out of control is assisted by recognizing the warning signs you are headed into debt problems. Moreover, the reason it is beneficial to spot financial red flags early on is it better facilitates amelioration of debt related financial obstacles before they get big enough to cause financial damage.

The Experian credit rating agency recommends keeping credit card balance to limit ratios low. In other words, if you find credit card debt becoming an increasingly higher percentage of total credit limit, it could be an early warning of larger debt problems. Small debt problems can creep up incrementally and sometimes go unnoticed. These small increases in debt snowball after time and become larger debt problems that make money management more difficult.

Depletion of savings


A savings account balance that declines even just a few dollars a month could be a warning sign debt problems are ahead. To find out if it is a warning sign follow the money trail. If the money from savings is being transferred into another savings account then it is more likely to be a re-shuffling of assets. However, if that savings balance is declining because of transfers to a checking account or for debt payments, then it could be signaling a potential debt issue.

Lower credit rating


By keeping track of credit scores consumers stay aware of how credit rating agencies view their credibility. Since these agencies themselves have measured credibility, it naturally follows a declining credit score means they have found financial reasons to substantiate a lower credit score. This credit score is itself an indicator of decreased ability to manage debt and potential warning sign of debt problems. The industry credibility of credit rating agencies such as Equifax and Transunion is measured by credit research performed by 'non-partisan' organizations such as the Policy and Economic Research Council (PERC).


Higher monthly debt payments


Another warning sign of potential debt problems is higher monthly debt payments. In some cases, a higher monthly debt payment may be due to mismanagement of cash-flow, however at other times it may indeed be a debt warning sign. Moreover, if higher debt is due to cash-flow, it may be resolved by a rescheduling of payments to fit income schedules. However, if the higher debt payment is due purely from increasing debt, then that too could be a warning sign of bigger debt problems down the road. The relevance of that warning also rises if the pattern of increasing debt payment continues over time. 


Overdraft charges


Overdraft charges are another potential debt warning sign. As with high monthly debt payments, these charges may be due to mismanagement of cash-flow. However, at other times they may indeed be a debt warning signal, especially if they increase in frequency and deplete the ability to pay debt. Said differently, overdraft charges themselves are a debt related expense, and too many of these charges can throw off monthly budget payments designed to pro-actively manage debt leading to higher debt payments later on.

Additional warning signs of debt such as hiding purchases are discussed in the video below:


Proper debt management is an important aspect of personal finance that effects budgeting, standard of living and financial planning. Staying within budget, keeping debt no higher than 30-40% of an available credit limit or paying debt off regularly are just a few of the ways to manage debt effectively. By being aware of debt management warning signs, avoiding larger financial problems before they start is possible.


Image license: US-PDGov