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. But then before you know it, you have multiple credit accounts, with little cash in the bank, and a debt total 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.

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 often 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 the store card. That’s all fine 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. 

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. A good credit score is built over time, and it’s important that you use a new account wisely by spending only what you can afford to repay.

A credit card vs a store 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 most often mentioned reason that many people get a credit card. They tell themselves that they need it for emergencies or that it will only be used to build their credit score (both valid reasons if intentions are honest)

But credit cards also tend to come with large limits, and one big purchase can put you in long term debt. The best way to avoid such spending, especially if you are a person who gives in to impulse purchases, is to lower your credit limit. 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. 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, then surely there’s nothing wrong with it. Even if you qualify for credit, it doesn’t necessarily mean that taking on additional debt is the right decision for your circumstances.

However, a car loan would imply additional debt commitments, which can only put you further into debt. If you absolutely needed a new car and had to finance it, you would 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. 

A real emergency

Now imagine you go ahead and buy a new car, even though it isn’t really the right time. Then you are in an accident. The excess is high, and you don’t have the cash to cover it. Since you rely on your car for work, you take out a personal loan to get it back on the road.

Up to this point, you haven’t missed any payments, and your credit score still looks strong – even though things are starting to feel tight. You go ahead and sign the loan agreement, planning to deal with the extra debt later. Without really realising it, you’ve stretched your finances beyond what you can afford.

Loans to cover loans

As financial pressure mounts, you start defaulting on payments almost immediately, causing your credit score to decline. You get the idea to take out a loan to pay for existing loans, but because your credit score is now low, it makes it difficult for you to qualify for a loan from a reputable lender. So, instead, you go to unregulated or illegal lenders, often known as loan sharks, who typically charge very high interest rates. This can lead to a dangerous cycle of debt. Before long, you find yourself taking out one loan after another, trying to keep up with whichever repayments feel most urgent.

Early warning signs of a debt spiral

• Maxed out credit cards
• Debt that exceeds 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 recognise these patterns, now is the time to start reducing your debt and adjusting your spending habits. The sooner you act, the sooner you can regain control.

Our article on getting out of debt can help you take the first steps in the right direction.