Credit is a very valuable tool in our finances, but it can also become a difficult problem to overcome and with serious consequences in several aspects of our lives. In this field, as in so many others, the key is not to incur excesses. But the limit between a healthy level of indebtedness and over-indebtedness does not always seem accurate. In addition, even having clear what is the edge, many debts are not the product of a cold and well planned calculation, but of an emergency situation in which there was no choice but to assume a new credit product, knowing that it supposed a weight too big for our pocket. That is why over-indebtedness is such a common problem, even among those who are truly good stewards. http://www.combustion-net.com/debt-consolidation-plan-have-one-towards-your-small-business-out-of-debt/ for an assessment
How to know when we are over indebted?
A quick response may be that we are over-indebted when our ability to pay is insufficient to meet the commitments made. But when is it insufficient? Here is that we do not always have things clear. As a guide to determine it, we made a list of some of the most common symptoms of over-indebtedness. Because they are so obvious, we exclude some of the most severe; For example, since April, double the salary of next December or that the banks stop calling to offer cards and start the even more annoying messages from the turbocobs.
We are over-indebted when our ability to pay is insufficient to meet the commitments made. But when is it insufficient? Click to tweet
If the fees exceed 35% of your fixed income
Some financiers recommend a debt ceiling close to 35% of the income of the person or the household. This, of course, will depend on each budget: total income, fixed expenses, expected potential expenses, the size of the family, etc. A single person with fixed expenses in food and basic services that do not exceed 40% of their income can take a mortgage and commit to pay monthly fees equivalent to 35% of their income. The remaining 25% would be available to save and respond to unforeseen events. However, a family of four with the same level of income and fixed expenses that account for 70% of that amount, could not afford to assume quotas that represent 35% of their income. In this case it would be advisable to set a ceiling of 20%, preferably, and incur the commitments after having formed an emergency fund or savings for eventualities. In conclusion, the level of debt that a person or family can acquire without over-indebtedness will depend on the size of their income, of course, but also on their fixed expenses. The advisable thing is that there is always a margin that we can allocate to saving, although temporarily it is modest.
If you pay, but go back into debt to make ends meet
This is another symptom of over-indebtedness. If you can pay the installments of your loans or cards, but the rest of your salary is over before the fortnight , you are in a deficit situation. At this point, the crisis can only deepen if corrective measures are not taken, especially when interest is paid on the loan. It is convenient to evaluate the ways to reduce expenses or contemplate the possibility of increasing the income, or betting on both, if possible.
If you have been making only the minimum payment to the credit card for months
Plastic credit is among the most frequent types of debts. Contrary to what many people think, making the minimum payment to the credit card does NOT prevent the payment of interest. In fact, this fee is determined considering the accumulated interest, bank commissions, the charges that are generated and a proportion of the capital owed and the due.
If you decide to make only the minimum payment , the capital owed will be reduced, but in the end the interest paid will represent an amount almost as high as the total amount consumed initially. The ideal, for a good financial management, is to avoid this practice.
If you expect an extraordinary income to pay the capital
If you only pay interest on your loans and you are waiting for “a brisita” that did not stop arriving to amortize, you are overdebted. The advisable thing is that, when assuming a debt, we have elaborated the payment plan. As debts are not always planned, and our decisions are not always rational, this is a more than likely scenario. This symptom also manifests itself if you have to mortgage assets or ask for help from relatives and friends to pay the capital.
If you ask for a loan … to pay other
Paying credits with other loans very often is a manifestation of over-indebtedness. Due to the stress generated by having several scattered debts, debtors are often attracted to the option to consolidate . But watch out! It is important to make sure you do it with the correct financial product. For example, that the new loan has a lower interest rate than the current loans and that the amount of the monthly installments does not exceed the payment capacity that is available.
What other symptoms of over-indebtedness can we add to the list? Leave us a message in the comments section Click to tweet
Yes, even if we are not in any of the above situations, the debts cause us uneasiness, we may be handling an excess of credit, not because of lack of ability to pay, but because of a particular rejection of indebtedness. Many people have a true aversion to debt and credit, even when they have levels that are considered healthy from the financial point of view. In this case it is convenient to settle the commitments as soon as the pocket allows it, without sacrificing the emergency fund.
Before arriving at excessive indebtedness there is the situation that we can call alert . This is what happens when someone can satisfactorily fulfill their commitments without having to incur other debts or ask for the help of relatives and friends, but feels that their budget is too narrow. In this case, it is also advisable to explore measures aimed at reducing expenses or increasing income, even if it is extraordinary, in order to gain a little financial freedom. It may be appropriate, for example, to sell things you do not need or do not use a lot and use the money to reduce the loan installments. That would avoid entering into a situation of over-indebtedness.