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Borrowing generally starts quite innocently - you take out a credit card to help you establish a credit score or open a store account because the discounts are so good (pointless really since they are offset by high interest rates). But then before you know it, you have whole wallet full of plastic, little cash in the bank, and a total debt that you wouldn’t even be able to pay off with a whole month’s salary. All of these are signs that you’re getting pulled into a debt spiral, and most people never even recognise them.

You, however, are smarter than that, and by the end of this article you’ll be able to identify warning signs and know how to avoid getting too deep into debt. The following situation is completely hypothetical, but it’s also one that’s very similar to the road taken by people who have found themselves in uncontrollable debt.

Your first credit - a store account

For many, the credit journey starts out with good intentions. People know it’s a good idea to build a credit score for the day when they’ll need it, and many start with a store card. It’s one of the easiest forms of credit to qualify for and doesn’t require you to have an existing credit record. Now, obviously, to get a credit score, one has to use said store card. That’s all fine and well as long as you don’t use the card to buy luxuries that you can’t yet afford. Resisting that temptation is hard, and it’s easy to tell yourself that you can just pay it back next month. But this view fails to consider the chances of other unexpected expenses.

The way to nip this habit in the bud is to use the store card only for essential items that you were planning on purchasing anyway. Don’t give in to impulse buys or get caught up in the feeling of being able to spend more than you can afford. A good credit score is built over time, and it’s important that you use a new account wisely by spending only as much as you actually have.

A credit card for emergencies

The instant gratification ‘afforded’ by a store card leaves some people wanting more, and a credit card doesn’t have the limitations of a store card, which can only be used at the store it was issued by. This is the real reason that many people get a credit card the minute they’re able to. They tell themselves that they need it for emergencies or that it will be used only to build their credit score (both valid reasons if intentions are honest). But you don’t need two credit accounts to build a credit score. 

If you were to stick to one kind of card (the sensible thing to do), a credit card makes more sense since it can be used to pay for almost anything. But credit cards also tend to come with large limits, and one big purchase can put you properly in debt. The best way to avoid such spending, especially if you are the type who gives in to impulse purchases, is to lower your credit limit and put a note in your wallet to remind you to consider the consequences of a purchase before pulling out your card. If your credit card is currently maxed out, and you can’t think of anything that you bought with it that was absolutely essential, the first warning bell has already rung.

New car, new debt

As your career progresses, you might feel the need for a new car. A person of your stature can’t be seen driving a skadonk. Luckily you’ve been meeting your store and credit card payments every month, and your credit score is looking solid. It shouldn’t be difficult to qualify for vehicle finance. You tell yourself that if lenders are willing to give you the credit, there’s surely nothing wrong with it. They wouldn’t give you finance that you couldn’t afford. But the truth is that only you know how much you can really afford. 

And the reality is that if you can’t pay cash for a vehicle, you can’t actually afford it. It would be smarter to drive the skadonk until you can pay cash for a new car. The car loan would only put you further into debt. If you absolutely needed a new car and had to finance it, you would, at the very least, need to draw up a detailed budget with cash flow projections for several months ahead, taking into account your existing debt and the potential for further vehicle-related expenses. If your accounts were already maxed out and the new vehicle payments would push you to the limits of what you could afford, it would be a mistake to accept the car loan. And yet so many people do.

A real emergency

Let’s imagine that despite advice against getting a new car, you did so anyway. And then you crashed it. And then there was a huge excess, and you didn’t have the money to pay for it. Since you needed the car for work, your only option was to get a personal loan to cover the excess and get your car back on the road. Up until this point, you haven’t missed a single payment, and your credit score looks great even though you’re actually broke and are at the edge of a debt precipice. Still, you sign the loan agreement and tell yourself that your growing debt is tomorrow’s problem. And what at problem it turns out to be. You’ve just pushed your debt beyond what you can afford. 

Loans to cover loans

You start defaulting on payments almost immediately, and your credit score tumbles. You get the not-so-smart idea to take out a loan to pay for existing loans, but because your credit score is now in the gutter, you don’t qualify for a loan from a reputable lender. So, instead you go to a loan shark. This shady character has no interest in the current state of your finances, and he charges a very high interest rate. Very soon you are taking out one loan after another in an attempt to pay the lenders who shout the loudest. 

All of this could have been avoided, if you listened to earlier warning signs:

  • Maxed out credit cards 
  • Debt that exceeded your savings 
  • A budget that predicts a cash flow problem (or even lack of budget)

Don’t wait until it is too late. If you are heading in this direction, start reducing your debt and amending your spending habits now. Our article on getting out of debt can put you on the right path.

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For more useful information on how to best manage your finances, sign up for our Money Mailer. In this free monthly newsletter, we serve up articles on topics ranging from saving to borrowing and everything in between. If you've ever wanted to know how to choose a credit card, how to cut down on living expenses or how to better manage your personal finances, the insights in these articles can leave you wiser, wealthier, and better equipped to make the most of your money.

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