Early-Warning Signs of Credit Trouble

It's becoming more difficult to pay my bills. At what point would it help to talk with a credit counselor?

Credit counselors actually wish people would visit them earlier than they do. "If people wait too long, they get into a circumstance in which there's very little that can be done to help them, short of bankruptcy," says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. "But there are a lot of opportunities if they get help early enough."

Here are five early-warning signs of credit troubles that could make it a good time to get help from a credit-counseling agency -- or at least make some major changes in your spending habits.

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1. Paying only the minimum amount due on your credit-card balances for two months in a row. Paying just the minimum kills you with interest charges and can extend your debt for more than a decade. If you have a $1,000 balance on a card that charges 18% interest, for example, and you pay the minimum of 2% of your balance each month, it would take 19 years for you to pay off the debt and cost nearly $2,000 extra in interest (twice as much in interest as you owed for the original balance). Many lenders have been boosting their minimum payments from 2% to 4% or 5%. But that could be tough to pay on time if you aren't prepared, leaving you with late fees, a higher interest rate and a lower credit score -- and making it even tougher to get out of debt. See our True Cost of Paying the Minimum calculator to see how much money you're throwing away on interest charges if you make only the minimum payment each month -- and how much you can ultimately save by boosting your monthly payments.

2. Regularly charging up to your credit limit. If you routinely max out your credit cards, then your spending is probably getting out of control. And creditors view this practice as risky, so they've been increasing interest rates and lowering the credit limit for people who charge the maximum -- and that, in turn, makes it tougher to get out of debt.

3. Charging essentials without a payoff plan. Charging essentials, such as gas and groceries, on your credit card isn't always a warning sign. Sometimes it's just better than carrying around a lot of cash, and it can earn you valuable rebates from your card company. As long as you pay off the bill in full by the deadline, you won't owe any interest on the charges. But if you routinely charge essential expenses and don't have a plan to repay those bills in 90 days or sooner, then it's often a sign that you're living beyond your means, Jones says. It's time to review your budget and find a way to pay for your essential expenses without going into debt.

4. Not knowing your monthly expenses. Some people come to credit counseling knowing how much they're paying in major monthly bills, says Jones, but they have no idea how much they're spending every day on extras, such as food, lunch, coffee and clothes. They also tend to leave out utility bills and insurance premiums from their calculations. Before you can get a handle on your debt, it's important to know exactly where your money is going. "There are so many things people don't realize that can take a lot of their disposable income, and minor changes can be made that give them the extra money they need," says Jones.

When people add up how much they're spending on coffee and lunches out, for example, it gives them an incentive to cut back and save the extra cash. Switching cell-phone plans -- or limiting your kids' text-messaging bills -- can also save a lot of money. "I think it's important to be honest when they do a budget," says Jones. "They have to look at the things they might have considered to be necessities in the past but now might be luxuries, like the extra $75 in cable television," says Jones. He also recommends limiting debt -- not counting a mortgage -- to no more than 20% of your income.

5. Not having an emergency fund. That extra cash can be the make-or-break difference when you have unexpected expenses -- as many people are discovering these days. And now that lenders are pulling back on home-equity lines of credit, it's even more important to keep extra money in an accessible account.

In this uncertain economy, it's a good idea to keep at least six months' to a year's worth of expenses -- or more if your job is in jeopardy -- in a money-market or savings account that can be tapped easily in an emergency. That target number isn't a realistic goal for many people who are already having a tough time paying their bills, says Jones, but it's a good idea to start with a goal of at least three months' worth of expenses in the emergency fund and add more whenever you get some extra cash.

If any of these early-warning signs apply to you, consider getting help from a credit counselor to get a handle on your finances before they get worse. Most credit-counseling agencies will help you set up a budget and spending plan for free -- which could be a good idea to do even if you aren't in financial trouble yet but are looking for ways to cut back if your job is in jeopardy. For more information about finding a reputable credit-counseling agency, see Credit Advice You Can Trust.