Coping with a Debt Crisis
After a rollicking good time shopping our brains out and charging up a storm, our debt has come home to roost big-time!
Once upon a time borrowers had to have a good reason to use someone else’s money. Lenders scrutinized requests for loans and borrowers had to sign over their first-borns. When credit became a commodity, like pig hocks and cornflakes, the focus moved from “granting” credit to “selling” credit and marketing efforts heated up. Pre-approved cards arrived in the mail, lines of credit became every man’s tool, and the no-money-down mortgage was born.
Fast forward to the collapse of the U.S. financial markets at the end of 2008 and the melt-down in the credit world all over the world. Now money is tougher to get – even for lenders – and everyone is tightening up their criteria. Borrowers watch helplessly as interest rates on their existing debt are bumped up by 2, 5, or even 10 percent. And lenders are putting their clients on notice: the good ol’ days are gone. Times are tough and they’re gonna get tougher.
One little hiccup is all it takes to tip a person over the edge when they’re walking around with a sack-full of debt. That’s why most experts recommend your debt repayment consume no more than 15% of your budget. If you’re over that limit, a reduction in hours at work or a layoff, a maternity leave or health issues --any unexpected reduction in cash flow or increase in expenses -- can de-rail your finances. Why? Well, when you’re spending a disproportionate amount of money servicing debt that leaves less for the most basic needs: a roof and food. If you run into trouble, the only way to keep the money needed for food and shelter is to default on the debt. And that has dire long-term consequences.
If you wait until the crap hits the fan to consider the challenges you’ll be facing as the economy continues it’s dipsydoodle, you may not have the wiggle room you need to cope when bad things happen.
Want to be in the driver’s seat?