Financial Trouble

How to spot the warning signs of excessive debt.


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Credit card debt can be a major - and unexpected - problem for far too many students. After surveying tens of thousands of first year college students*, we've found that most expect to graduate with little or no credit card debt at all. Unfortunately, if students don't consider the possibility that they could find themselves in a bad financial situation, they may not take the steps necessary to prevent a small problem from becoming a major financial crisis.

Obviously, the best way to deal with debt is to avoid it in the first place - get organized, make a financial plan, stick to a budget, and save an emergency fund that can be used for paying off an unexpected bill. But even if you never have a problem with debt, understanding how people find themselves in trouble can be a great way of helping a friend or family member deal with a difficult situation.

For some, major credit card debt happens quickly as the result of a financial emergency - a major medical bill or the loss of a job, for example. But chronic debt rarely happens all at once for most people. Little by little, month after month, their credit card balance increases as the result of unplanned purchases. Sooner or later, they discover it will take months or even years to pay it all off.

Chronic debt usually happens in three stages:

  • Stage 1 - Surprise. People simply spend more than they can afford, and are surprised when they open their credit card bill. They check all charges thinking there's got to be a mistake somewhere, but all charges are correct. If caught in time, chronic debt can be forced into remission at this stage by simply changing spending habits and sticking to a monthly budget.

  • Stage 2 - Denial. In the denial stage, people deny there's a problem for months or even years at the time. They think everything is under control since they are able to make their minimum payments. A credit card company may even raise their credit limit, which some see as an invitation to spend more. The problem is that their total indebtedness continues to rise.

  • Stage 3 - Full Onset. In the final stage of chronic debt, people are unable to maintain debt payments, their accounts are suspended, and their total debt continues to grow because of interest and fees. Interest rates can be well over 30% for those with chronic debt problems, making the payment required to pay off a $10,000 debt nearly $500 per month for three years. Some people may have legal proceedings brought against them and have their wages (current or future) garnished, meaning that their employer is forced to send a portion of their pay to creditors each month.

If left unchecked, all cases of chronic debt have the same result - a person's credit rating is ruined and future attempts to finance a car, home, or to even get a new credit card may be refused. In fact, employment options may even be limited since many employers use credit reports when making hiring decisions.

Unfortunately, one in five Americans have bad credit, which is commonly defined as a credit score below 620**. You or a family member may have already had a serious problem with debt. And since most credit card companies will not open accounts for those with very low scores, people with bad credit often are trapped in a cycle of high interest, high fee credit services - interest rates of up to 79.99% apply to credit cards for people with the worst credit scores. The use of predatory lending services such as payday loans and check cashing services is also higher for those with bad credit.

If you're worried about debt or know someone who is, we provide extensive resources for understanding and dealing with debt elsewhere on this website. Those with debt problems will also want to make a plan for addressing their problem, which may include speaking with a financial aid officer or consumer credit counseling service.

* Decision Partners Financial Literacy 101 Pre-Course Survey, 2010-11 Academic Year
** Equifax, "Across the Country, Consumers are Moving Out of the Subprime Credit Score Category"

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