This is part three of describing the 5 phases of your debt cycle: applying only the minimum payment amount. If you missed the other articles, you can read them here:
- The 5 Phases of your Debt Cycle
- Part 1. Learning How to Save Money
- Part 2. Using Available Credit as a Fallback
Just to recap, part 2 of the debt cycle talks about using your available credit as a source of an emergency fund. As you continue to utilize your available credit, your balances will start to increase as well as your minimum monthly payments. This causes your monthly disposable income to shrink and you’ll soon find yourself struggling to just keep up with the monthly minimum payment amount.
During this stage, there’s a lot of concern for being reported as 30-days late on your credit report. You worked hard over the years to maintain a healthy credit score but now you face the risk of being delinquent on your accounts. A trend that I’ve seen is people who keep “revolving” their credit cards.
As soon as they make their monthly minimum payment, they now have a little available credit since some of the payment went towards paying off the principal. As soon as they see this, they immediately utilize this credit for their everyday purchases.
If you find yourself in this situation, it should be an immediate warning sign that you’re headed towards financial disaster. Here’s what you can do to alleviate the situation:
Overcoming Paying Only the Minimum Amount Due
- Cut down to BARE essentials- The first step should always be to take a second look at your budget. Go through the last 3 months of your bank statement and carefully itemize each expense. Figure out where you’re spending the most money. Next, cut down to the bare essentials. This doesn’t mean “downgrading” your cable plan; it means shut it off immediately!
- Contact your Creditors- At this point; there shouldn’t be an urgency to immediately seek out debt relief help. Believe it or not, your creditors do want to work with you. The last thing they want is to see you file for bankruptcy or settle your debts. Most creditors will offer a short-term assistance the lasts anywhere from 6-12 months. One thing to keep in mind is that there’s a possibility that your accounts will be closed. If you’re serious about getting out of debt, this shouldn’t be a problem right?
- Hide your credit cards- Most people might tell you to cut your credit cards and throw it away. But the reality is that life is filled curve balls that might warrant a reasonable use of your credit cards. At the end of the day, your well being still outweighs being in debt. Put your credit cards in hard to reach places, and remove your credit card numbers from any online merchant that stores your credit card information.
- Find secondary income- How much time do you waste at home doing nothing? Can you use that time to find a second job or even partake on side gigs to bring in extra income? There are plenty of opportunities out there to earn side income for doing small tasks. Earning $10-$15 per gig might not seem like a whole lot, but if you do several of these per week, you can earn $100+ a month. If you’re struggling to make your minimum payments, that $100 will seem like a fortune.
Don’t wait until the problem worsens. Accept the fact that you’re finances isn’t in the best shape. Denial is your worst enemy at this point. Our next article will explain what to do if you aren’t able to keep up with the minimum payments and are looking for debt relief options.