There are any number of signs that can indicate when a person is in financial distress: skipped mortgage payments, the inability to grow savings, a paycheck-to-paycheck lifestyle, etc. No matter what your reason may be, there are steps you can take to address your situation. The only thing you can't afford to do is sit back and see if things turn around on their own.
Minimum Payment Only
Making only the minimum payments on your credit cards is often the first indication of trouble. If you can only afford to make the minimum monthly payment on your debts, you're prolonging the time it will take to pay off your accounts and hamstringing your budget at the same time. Not only will it take you the longest amount of time possible to pay off your debt, you'll end up paying much more in interest, very likely more than you originally borrowed.
According to bankrate.com, today's average APR for a fixed-rate credit card is 13.02%. If you were to purchase a television for $1,000, your minimum monthly payment (calculated as 2% of the balance) would be $20.* While that may fit comfortably within your current budget, it would take you 50 months to pay off your new television. If you were to make a number of similarly significant purchases during those 50 months - perhaps having to replace a washer, dryer, or a refrigerator, you'll have backed yourself and your budget into a financial corner that you won't easily escape until those four years have passed.
If you're only able to make minimum monthly payments on your credit accounts, it's time to take a step back and analyze your current spending habits. We suggest that you record how you spend your money for at least one month. At the end of that time, you'll be able to clearly see where you can cut back or reduce some of your expenses.
Note: Credit card interest rates and minimum payment percentages vary by creditor.
Using Your Emergency Fund to Pay Down Credit Card Debt
If you've started to raid your emergency fund to pay off your credit card debt, you're putting yourself at risk and need to stop immediately. It generally takes years to build an effective financial safety net, which every family needs to protect it from medical or other financial emergencies. Removing or damaging that net is symptomatic of misplaced financial priorities. You must prepare your budget to withstand occasional emergencies, and that means keeping your credit purchases under control so that you can build and maintain your emergency fund.
It's important to have enough money in your fund to cover 6 months' worth of basic expenses. In the event of a complete loss of income, this fund will allow you to stay afloat while you search for new employment. In the event of a medical emergency, however, your emergency fund may also allow you to cover a large percentage of the bills without wiping out your primary savings account.
Before reaching into your emergency fund and putting yourself at risk, talk to your creditors and explain your financial situation. They may be able to give you more time or lower your interest rates. In addition, your financial situation will be noted on your accounts and be available for your creditors to see before they call you. Some creditors have been known to offer "hardship payment plans" to customers who have significant difficulty making their monthly payments. If you're unable to convince your creditors to lower your interest rates or offer you a payment plan, you should strongly consider contacting a non-profit credit counseling agency to see if they can help.
Taking a Second Job Just to Survive
Working two or more jobs should be a choice, not a necessity. If you're currently working multiple jobs just to make ends meet, it should be no surprise to hear that you're financially overwhelmed. Unfortunately, there is no easy fix if you already require two incomes. One of the things you can do is obvious - start looking for a job with higher pay that will allow you to work regular hours. At the same time, you need to reassess your spending priorities and see if there are any reductions you can make, even if only temporarily.
The consequences of working extensive hours to make ends meet are more than just missing out on time with your family. Did you know that financial stress can affect your health? Anxiety and depression are just two of many stress-related health conditions, but underlying issues may also start to develop or worsen, such as:
- Heart disease/heart attack
- Gastrointestinal Problems
- Weight gain/loss
- High Blood Pressure
If you develop any of these conditions or are concerned about your health in any way, see your doctor as soon as you can. In an effort to combat health issues, you may also want to ask your doctor about safe stress-relieving activities that you could practice, such as yoga or meditation.
What Can You Do?
If you think you're in financial distress, it's not too late to ask for help. Cambridge Credit Counseling can help you better manage your payments until you can get back on your feet. Our services include:
- Credit counseling and debt management services
- Housing counseling, including foreclosure avoidance, first-time homebuyers, and reverse mortgage counseling
- Student loan counseling
Whatever your concern, we'd love the chance to help you live a more financially fit lifestyle. Contact us today at 800-527-7595.