Routine check-ups for financial health
By Morris Kaplan
As we all know (or should), it takes a disciplined mind and a methodical person, to force oneself to undergo a thorough annual medical check-up. Particularly when you’re feeling absolutely fine. But with debt, the situation can be akin to the hidden cancer. Sinking into debt begins slowly, but it quickly can in serious consequences. The problem usually starts when a person falls behind in monthly payments, or when he or she manages to make the minimum payment due on a credit card but isn’t able to pay anything toward the principal on the loan or bill. Little by little, the debtor begins to drown in unpaid bills. He or she gets dunning notices and phone calls from creditors.
The consequences of bad debt begin to take their toll – anxiety, worry and intimidation; the debt spiral begins; black marks appear on the debtor’s credit record, and potentially the worst outcome – failing to have unused credit lines for emergencies.
You may walk away, but it has been my experience that you can’t hide from creditors. In fact, “walking away” is probably your worst option for handling a debt problem. Even employment prospects can be affected by poor behaviour around debt. Many employers check credit reports before making hiring or promotion decisions. A negative mark on your credit report, issued by your creditor for nonpayment, will raise questions and concerns that may result in you being a less-attractive employee.
Even before a default notice is issued, late payments on for example credit cards can result in after shocks. Many credit card issuers have a penalty interest rate of 25 percent to 30 percent, once late penalty fees are added and interest remains unpaid. If you were reluctant to open your credit card statement before your statement will start to look even more unappealing. Your credit score will potentially drop, and a lower credit score means new loans and credit will cost you more.
Be sure also that those outstanding debts will be pursued. Today with advances in technology, debt collection has become far more sophisticated than yesteryear. Even the unpaid $50 mobile phone account form an earlier service provider may end up being turned over to collectors, lawyers or be sold to professional debt buyers. Interest will accrue and fees will be charged. Your phone will begin to ring more often and you will never want to talk with the person on the other end of the phone. Although the ACCC and ASIC protects you from abusive collectors, it does not prevent legitimate collection procedures, which, even within the law, can ruin an otherwise nice day.
If you can answer yes to any of the following questions, you could be facing a credit health emergency.
Have you:
1. Argued with your spouse or partner over bills?
2. Increased the percentage of your income being used to pay off debts?
3. Approached or reached your credit limits?
4. Paid only the minimum on revolving accounts?
5. Been chronically late in paying bills?
6. Borrowed to pay for items you used to pay for with cash?
7. Put off medical or dental visits for financial reasons?
8. Reached a point where losing your job would place you in immediate financial difficulty?
9. Been threatened with repossession of your car or credit cards or with other legal action?
10. Avoided calculating your total debt and are afraid to add it up?
A better idea than walking away from your obligation would be to get some help working out things with your creditors. If communications are breaking down, contacting a reputable credit counseling agency may help you come to terms with your creditors and determine the best course of action given your specific financial situation. If all else fails, you may want to get some legal advice to deal with your problem. Walking away will not solve your problems, quite simply because your creditors won’t let you.
Morris Kaplan is an Author and Business Journalist. He is the author of ‘Five Years to Financial Freedom’ and ‘Financial Freedom for your Business’.