Credit is a wonderful tool which enables you to own assets, tide over short-term emergencies and even helps you establish a business or enables you to improve your career prospects. The utility of credit gets established in more ways than those listed above.
However, handling of credit responsibly is the element paramount. Improper and irresponsible use of credit can land you in deep financial trouble and will greatly affect your chances of availing future credit.
Bad handling of credit often comes up with warning signs before turning into problems of greater magnitude. If you are alert and can look for clues when any one of these warning signs pops up, you might be able to save yourself from a financial disaster waiting to happen.
Just as you rush to your car service station when any warning light pops up on your car dashboard, any warning sign of credit and debt problems warrants similar attention.
We have listed below some warning signs of impending debt problems that might be calling for your attention. Make sure you do not ignore them and take corrective action at the earliest. You might not be late on any payments yet or seeing sliding credit scores, but don’t allow yourself into a false sense of control if any of these symptoms arise or are already present.
You Constantly Make Only The Minimum Payments Required On Your Credit Cards
Your credit card outstanding bill comes with 2 figures, one for the Total Amount Outstanding and one for Minimum Amount Due. Many individuals do the mistake of paying just the minimum amount due, not realizing that doing so will only help them avoid the late payment fee. Paying only the minimum amount due will attract the interest on amounts over and above this figure. As you know, credit cards being instruments of unsecured credit charge highest rates of interest between 32-40% p.a.
If you are consistently paying only the minimum amount due to non-availability of funds, this is a warning sign. It signifies that you are constantly spending beyond your means of repayment. Before you get into a trap of rolling credit card debt, take control of your finances.
You Hardly Have Any Savings
Savings is a safety net for your finances. It is very essential for you to have savings to help you tide over emergency situations like hospitalization of a dear one, purchase of assets, investments for your future, etc.
However, if you find yourself in a situation where you live from salary to salary, it is a warning sign beeping red. You must build up your saving fund or you will be running to avail credit every other month. Not only will interest and EMIs burden your failing finances, frequent applications for credit reduce your chances of credit approval.
It is good to draw up a budget for your expenses and cater for savings too.
You Have Started To Use Your Credit Card For Things You Earlier Used To Buy With Cash
Payments by credit cards are highly convenient. You do not have to carry around stashes of currency to make your purchases. While payment using cash or credit is a matter of personal choice, extensive use of credit card is a warning sign.
When you get your credit card statement at the end of each billing cycle, it is a good idea to note your level of credit utilization. If you are constantly using anything higher than 60-70% of your credit limit, it is a warning sign for you.
Credit Card Limits are set depending upon your income and repayment capabilities. Therefore, if you find yourself using higher percentages of your credit limit, it means that you are unable to contain your expenses.
Ideal credit utilization ratio should be around 30-40% of your credit limit
You Are Using Increasing Amounts Of Your Total Income To Pay Off Debts
Your income is meant for your consumption and savings. But there is also the third element of debt repayment. If you see that you are using increasing amounts of your total income to pay off debts, this is a warning sign. Lenders have a look at your monthly income statements before approving loans/credit to ensure you have a comfortable debt to income ratio. However, you might have borrowed from your friends/ family/unorganized sector or from sources which do not adhere to these limits strictly.
If you are spending more than 30-40% of your income on debt repayment, that is a signal for you to rework your budget and have a look at unnecessary expenses that require you to avail credit again and again.
You Already Have Two Or Three Credit Cards And Are Still Looking For More
Credit cards are wonderful instruments of credit. If you already have 2-3 credit cards and are looking to increase their number as you seem to be maxing out the utilization on all of them, you are in trouble.
Bear in mind the fact that you have to repay all of your credit cards’ outstandings on time. Going in for more number of credit cards will aggravate the situation for you, as it will be difficult for you to keep a track of outstanding, due dates, etc. Also, it will convey that you are a credit hungry person.
You Take Out Cash Advances On Your Credit Card To Pay Other Bills/Expenses
Cash advance is a feature available on your credit card, but it should be used only in the rarest cases. Cash advances on credit cards are charged heavily. You will not only have to pay interest charges on the amounts that you withdraw, but you also have to pay cash withdrawal charges.
It is a very bad idea to draw cash from your credit card to pay other bills/expenses. If you find yourself in situations where you have to do this, it calls for a serious recheck of your expenses and spending patterns.
You Are Looking To Increase Credit Limit On Your Credit Card
Credit limits on credit cards are set based on your income limit and repayment capacity. When it comes to expenditure on your card, it is good to limit it to 30-40% of your credit limit. If you are reaching the maximum limit and looking to increase your credit limit further on your cards, signals that you are overspending on your card.
It might be difficult for you to repay the amounts spent beyond your repayment capacity. If you are looking for ways to increase your credit limit, it is a warning sign that you should look out for.
You Have Tried Making A Purchase With Your Credit Card And Been Declined
Credit card purchases may be declined for a host of reasons like network issues, wrong input of a PIN, etc. However, if your card purchase is being declined due to reasons such as non-payment of outstanding or credit limit exceeded, then these are warning signs for you to evaluate your spending and repayment pattern.
You Write A Cheque Hoping To Cover It Before It Clears Your Bank
A cheque is an instrument that promises the other person of your payment. These cheques may be drawn for repayment of your loan EMI or to a certain individual.
If you are in situations where you issue a cheque and wish that it does not reach your bank before your next salary or till you are able to put in funds, it is a very dire sign of financial distress. Also, if you frequently see your cheques being returned due to the paucity of funds in your bank account, it is probably the time for you to check your finances in detail.
You Have Been Denied A Credit Card
Credit card applications are approved on the basis of your employment status, your employer, income and other factors like your credit score, repayment capability, etc. Denial of a credit card application could be due to many reasons. One of the most prominent reason is the increased number of hard inquiries. If you have been constantly applying for one or the other type of credit, it will all be considered as a hard inquiry when the lenders pull out your credit score from the credit bureaus.
If you are denied a card due to this reason, it is a warning sign that you are looking for a lot of credit or living beyond your means of income.
You Get Calls From Collectors
Lenders employ collection agents who are given the responsibility to ensure the collection of unpaid loan/other credit repayments beyond a certain point in time. If you are getting calls from such collectors, it means that your loan accounts are overdue for payment. It is a big warning sign that you are unable to make good your commitments towards your credit.