Amy has a master's degree in secondary education and has been teaching math for over 9 years. Amy has worked with students at all levels from those with special needs to those that are gifted.
Meet Jason. He is in his early twenties and totally enjoying his newly found freedom. He just moved out on his own for the very first time, and he is living it up. He goes out every weekend with his friends, and they go to all the popular restaurants around town. But Jason isn't very rich. In fact, he has a job at the local coffee shop that pays just enough to cover his rent, utilities, and some extra for groceries and gas. So, how is Jason able to live it up like he is doing? He does this by relying a lot on his credit cards and a personal loan he was able to get right when he finished college. Even though Jason tries to pay back as much as he can each month, he finds that his debt isn't getting any smaller. As a result, Jason has been labeled as an at-risk customer by his credit card companies and by his personal loan company. These companies are starting to see signs that maybe Jason won't be able to pay back his debts and loan.
In this lesson, we define debt as what is owed to someone else whether it be an individual or another business. A loan is the same as a debt except a loan is generally a formal debt you enter into in writing. Let's take a closer look at Jason's warning signs in this lesson.
Paying Only The Minimum
The first sign that Jason shows is that he is only paying off the minimum amount he owes. This means that when Jason gets his invoice, he pays the very minimum payment that is allowed. See, each of his credit card invoices shows Jason the total that he owes along with the minimum payment that he needs to pay for the month. Jason can pay any amount above the minimum. But if Jason doesn't pay the total amount he owes, the credit card company charges him an interest rate on the amount he hasn't paid. It will take Jason quite a few years to pay off his credit cards if he only pays the minimum, and if he continues using his credit cards, then he won't be able to pay it off at all.
This leads us to the second warning sign that Jason is getting himself into. Because Jason is only paying the minimum and he is continuing to use his credit card, his credit card debt isn't getting any smaller. In fact, his debt keeps getting bigger and bigger. He is charging his credit cards more than he is able to pay them back. This is not a good thing. If he can't pay back his credit card debt, there will come a time when he will have reached his spending limit. Thus, he will have no more credit card money to fall back on.
When this happens, Jason may start to make his payments later and later, another warning sign. At first, Jason made all his payments on time. He was never late. Now, though, Jason is scrambling to come up with the funds to pay all his bills. His expenses include his rent, utilities, credit card bills, and personal loan bills. Jason has so much debt now that he doesn't know what to do or how to pay it off. He has maxed out some of his credit cards, so he can't make payments anymore with those cards. In order to pay off all his bills, he sometimes needs to wait for his next paycheck before paying the bill. But waiting for the next paycheck means he is paying late. When he makes a late payment, his credit card company and personal loan company charges him a $35 late fee each time. So, on top of not being able to use his credit cards, his credit card company is adding additional debt because he is making late payments. This doesn't sound good for Jason at all.
Jason is so stressed out, he now decides to do the one thing he never thought he would do. He doesn't pay every single bill. He pays when he can and misses payments when he can't. Having missed payments is the last warning sign that someone is unable to pay a debt. Jason sees that sometimes he needs to wait for his second or third paycheck before being able to pay a certain bill. When he has to wait that long, he has missed payments on his account.
As you can see, the warning signs that come with not being able to pay back debt can escalate from one to the other with more and more debt. We define debt as what is owed to someone else whether it is an individual or another business. A loan is the same as a debt except a loan is generally a formal debt you enter into in writing. The warning signs that someone is unable to pay back a debt are these:
- Paying only the minimum
- Increasing debt
- Late payments
- Missed payments
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