This is a guest post from Tristan Ferguson. He lives in the Northeast and writes for finance publications. He also teaches online finance courses. This post contains affiliate links.
It’s easy to tell when friends or fictional characters on your favorite TV show are in toxic relationships. Typically, one or both of the partners are unhappy because toxic relationships are bad for you.
The tricky part is, although some people are fundamentally toxic and bad for any relationship, most toxic relationships are the result of a bad combination of personalities. When both people are free of one another, they can go on to have successful, fulfilling, healthy relationships with a partner who’s a better match for them.
It’s that way for some people with credit. Many folks can use credit responsibly in a way that enriches their lives, offers important opportunities, and doesn’t bog down their personal wealth.
For others, the relationship saps their resources, adds stress to their lives, and generally makes them as unhappy as a romantic relationship with a toxic person.
Here are 10 signs you have an unhealthy relationship with credit — and some steps you can take to improve that relationship.
10 Signs You Have a Toxic Relationship With Credit
1. Your Net Worth Keeps Going Down
You calculate your net worth by adding all of your assets (like home equity, savings, stocks, and retirement accounts) and subtracting from that all of your liabilities (like balances on credit cards and other loans). Ideally, the general trend of an adult’s net worth is upward, with an adjustment for their first home loan.
Everybody has the occasional bad month, but if your net worth is consistently decreasing month after month, that’s a definite sign you need to adjust your relationship with credit.
2. You Carry a Balance (or the Balance Is Increasing)
The best way to use credit cards is to make regular purchases, then pay them off during the grace period where finance charges and interest don’t apply. This builds your credit score and accumulates reward points without costing you anything other than a little extra effort.
In a perfect world, you would keep a credit card balance of zero. Unfortunately, the average American household carries $8,600 in credit card debt. If you carry about that much in credit card debt, you’re far from alone — and you might have a toxic relationship with credit.
3. You Use Credit for the Essentials
If you use credit to stretch your budget occasionally when a can’t-miss opportunity arises, that’s fine. It’s also OK to put regular expenses on your credit card if you can pay them off quickly to build credit and earn points.
But putting necessary expenses on your credit cards because you can’t make ends meet is a sign of trouble. Worse, it’s likely to become a bigger problem each month as the interest on your credit card balances makes it even more challenging to pay the monthly bills.
4. You Scramble to Make Your Minimum Payments
Ideally, you should pay more than the minimum on your credit accounts each month. If you’re scrambling to make even the minimum payment, or you’re paying late because your pay periods didn’t line up, it’s another bad sign.
First, it shows your toxic credit situation is making your quality of life lower than it needs to be. Second, only paying the minimums which will cost you in the long run as interest accumulates on the remaining balances.
5. Your Credit Score Is Holding You Back
Credit scores come in two varieties. A high credit score means easy access to loans with good rates and approval for cards with the best rewards. A low credit score means denial for loans that could improve your situation and expensive rates on the loans you do get.
Guess which one indicates a good relationship with credit?
6. You Rely on Consumer Credit
Credit experts recommend using credit for purchases that improve your net worth. For example, a mortgage, student loan, or personal loan to consolidate debt can improve your financial situation and is a smart move if the numbers work out.
By contrast, credit card debt and car loans just make whatever you buy with them more expensive than if you saved money to buy them. Most Americans carry consumer debt. But if you find yourself considering a purchase by asking yourself if you have enough credit available, rather than if you have enough cash to spend, it’s a sign of a toxic relationship with credit.
7. You Don’t Know Your Balances
We’re not saying you should memorize all of your balances to the penny. We are saying two things:
- You need to have a general notion of how much your balances are, within $100, whenever you consider using a credit card.
- You should have a regularly updated spreadsheet or tracker to look up the balances easily.
Knowing your loan balances shows you’re keeping track of your financial situation and that you can make informed decisions about your spending. Not doing so means, at best, that you don’t. At worst, it shows you know your situation is bad, but you’re afraid to see exactly how bad.
8. You’re Frequently Stressed About Money
Stress can hurt your sleep, relationships, work performance, and even your health. Check yourself for the following signs of financial stress:
- Frequently overspending
- Hoarding money or goods
- Not opening bills because you’re afraid to see what they say
- Fighting often with your partner about money
- Losing sleep over financial issues
- Not having or sticking to a budget
- Feeling anxiety any time you spend money
- Choosing between two necessities because of the cost
An unhealthy relationship with credit can be both a cause and a symptom of financial stress. So if any of the above signs look familiar, you might want to examine your credit.
9. You Keep Paying Fees
A perfect relationship with credit is one where you pay low interest rates on your mortgage or student loans and pay off credit cards during the grace period so you never pay interest.
A bad relationship with credit is one where you pay late so often you consistently incur late fees.
In the middle is a relationship where you pay low interest on all your cards and pay on time, so you’re paying interest but no major penalties for not being on top of your debt.
As we mentioned earlier, most American households carry a credit card balance, so there’s no shame in facing a late fee on occasion. But you should still do what you can to improve your situation as quickly as possible.
10. You Consistently Need Short-Term Loans
Almost everybody at some point in their lives must hit up a family member or talk to the bank about a loan to bridge the gap before payday. It’s not a great situation, but if it happens just once, there’s no reason to panic.
But if you do this regularly, it’s a bad sign. It’s an even worse sign if you need the loan two months in a row because of the costs associated with the loan. That’s the beginning of a vicious cycle.
What to Do If You Have a Toxic Relationship With Credit
If you checked off between zero and three items on this list, you’re not in any real trouble. You could improve your financial situation, but you’ve largely got things under control.
If you checked off between four and seven items, you need to take a hard look at your financial situation. Find out how to save more money and spend less so you’re consistently spending less than you make each month.
If you checked off eight or more items, then we recommend you contact a financial advisor or debt counselor as soon as possible. You’ll need professional assistance to get back on the right track.
Final Thought
Remember earlier when we said some people are fundamentally toxic and bad for any relationship? These people exist in the world of credit too, in the form of predatory lenders.
Although credit can be expensive, and you should avoid carrying a balance wherever you can, most credit agreements are made in good faith. The goal of the lender is to charge you as much as they can for a mutually beneficial arrangement. However, some lenders are out to trap you in a cycle of never-ending payments to make themselves rich.
These lenders exist for every single type of loan. Always check the terms of any loan against the averages in your area. Further, a few types of loans tend to be toxic from the outset, including and especially payday loans, debt consolidation loans, personal lines of credit without collateral, car title loans, cash advances from credit cards, and pawn loans. Just like that one guy or girl who might seem like fun but will break your heart, you should avoid these at all costs.
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3 comments
This hits home for me , as I’ve checked off every single item. My issue isn’t just debt, it’s undervaluing my time, which I’m working on.
I have just started reading your blog (I have had issues w/ debt myself) and all it took was my wife to get me on the right track.
What are your thoughts on a 401K loan?
Hmmm I am not qualified to speak on a 401k loan. Look at the fine print and review pros and cons.