There is the risk though that even with “good debt” that you can over commit. So how do you know if you have too many financial commitments?
Being in debt can be a good thing if it is able to put you in a better financial position.
Too many financial commitments cannot only have a negative effect on your finances, but it can start to impact other aspects of your life.
You don’t know how much you owe
Being able to state how much you owe for each commitment is a good start to keeping them under control. Spending further on a credit card without knowing how close you are to the limit is a sure sign you not in total control.
You should also be regularly tracking your bills to ensure you have enough money for the repayments. Checking the bill thoroughly is also important. Companies can make mistakes, so if they accidentally charge you extra and you don’t check your bill properly, it will be you that is out of pocket. Ignoring bills and paying them late can indicate that you are overcommitted and worse still it could impact your credit record if it goes on for too long.
Recent changes to credit reporting mean that when you apply for credit the lender may be able to view the repayment history on all your commitments.
Can only afford minimum repayments
Minimum repayments on credit cards are designed to cover the interest accrued plus only a small percentage of the actual amount you owe. If you find that you can only afford the minimum amount, you may have too many commitments. In order to pay off the debt quickly and avoid being stuck with the repayments for years, increasing the repayment beyond the minimum is a great start.
Cannot get new credit
The number of financial commitments and credit enquiries have an affect your credit score, so the more debt you have, the harder it may be to obtain new credit. If you have been declined by a credit provider, make sure you enquire as to why your application was unacceptable. This will give you valuable insight into what the issue was so that you can remedy it or avoid applying for credit until it is passed.
You borrow money to repay bills
This is a definite sign that you are in over your head. If you are unable to afford your living expenses with your income, you will need to cut down on your financial commitments. Borrowing money to pay bills can become a vicious cycle that will only bury you deeper into debt. Consolidating debts by increasing your home loan to pay them out or by rolling them into a credit card or loan with a low interest rate will only work to save you money if you actually work to pay them off quickly.
Expiring interest free facilities
Interest free deals can be a good idea if you have the funds to pay it off in full as soon as it expires. Most come with very high interest rates at expiry so what seemed like a good idea 12 or 18 months ago could end up costing you a lot in interest. You don’t know what the future holds and what will be happening in the future that may mean that you don’t have the funds to pay it off. Also be careful when signing up. Check the monthly service fees that are charged as they could equate to interest that is just called something else. Put the funds away to pay it off so that when it expires you can pay it in full.
You cannot save money
Savings can act as a buffer if the unexpected happens, like if you lose your job or a major unexpected expense comes along. Consistently saving a proportion of your income will help provide peace of mind. A lack of savings can happen for a number of reasons but if there is nothing left over after each pay then it may indicate that you are over committed and you have a problem. Look at your expenditure and what you can trim in order to start saving.
Your finances are affecting other aspects of your life
Continually worrying about your finances can have a negative effect on your life. Worrying about how you are going to pay the bills may start to affect your performance at work, your mood at home and even your sleeping patterns.
If you do have too many financial commitments, it is important to do something about it to avoid becoming overwhelmed with debt. Here are some simple steps to get you started.
List all of your ongoing expenses and start the process of elimination. Start by looking at contracts that are easier to cancel such as gym memberships, paid TV and phone plans. Unlike other commitments such as personal, car and home loans, these contracts can usually be cancelled quickly, immediately releasing some financial pressure.
Prioritise your bills. Start by choosing the debt with the highest interest rate and start putting any extra money towards paying it off.
Seek professional help. There are financial experts, such as accountants and financial advisers, who deal with debt every day and can help create a personalised plan for you.
State Custodians have home loans for people with credit issues or who just need help to get back on track. If you are interested in refinancing to consolidate debt give our Lending Specialists a call on 13 72 62 or enter your details here for us to contact you to. We can help you work through your options and show you how quickly you can repay your debts by consolidating them into a lower interest rate and single repayment.