7 Warning Signs You're In Debt Denial

Many people are in denial about the debt that they owe. When faced with the ugly truth, it's sometimes easier to or minimize the importance of it or flat-out reject the extent that we're in debt. The longer you stay in denial, the bigger the debt grows. Learn to know the warning signs before denial kicks your finances where it hurts.

1. Taking on debt to pay down other debts

This kind of strategy will dig you into a deep debt hole in the blink of an eye. If you get a credit card to pay off another credit card, your money woes can quickly multiply. Interest will keep on accruing. And eventually, the balance still needs to be paid.

There can be certain exceptions to this. A low-interest loan to pay off high-interest debt can be a smart way to minimize interest payments, so long as it is paid back quickly. A classic example is using a balance transfer credit card with a promotional 0% APR, or consolidating debt through a home-equity loan or a refinance.

However, even with these strategies, you must be very careful. Balance transfer credit cards should be paid off in full before the promotional 0% APR window closes and normal interest rates kick in. And your home is not a bottomless piggy bank, as many people found out in the 2008 housing crash. (See also: When to Do a Balance Transfer to Pay Off Credit Card Debt)

2. Not having any kind of monthly budget

One of the best ways to address your debts is to get a complete picture of your finances. You should know your monthly incomings and outgoings, and create a budget based on that information. If you ignore budgeting and just try and wing it month to month, you could be in serious debt denial. This is a shaky foundation for your financial future.

It's important that you keep a record of every penny you spend, every penny you earn and save, and every cent you have in debt. That way, you can create a monthly budget to ensure that the bills all get paid on time, you spend only what you need to on food, entertainment, and clothing, and you have enough left over to start paying down your debts. (See also: Stop Using These 5 Excuses Not to Budget)

3. There are stacks of unopened bills laying around

A big red flag that signals debt denial is refusing to even acknowledge what you owe, and how soon you owe it. By letting your bills pile up on the kitchen counter unopened, you are merely putting off the inevitable. Sooner or later, the bills have to get paid. If they don't, you can be cut off (which requires additional fees to reinstate service), you could have your car repossessed, and you could even lose the roof over your head.

Attack that pile of unopened bills as soon as you can. If they are too big to handle, call your service or loan providers and see if they'll work out a payment plan with you. You never know until you ask. Oh, and if you are scared of looking at your bank or credit cards statements, that's another warning sign of debt denial. Bite the bullet and face the truth. (See also: Pay These 6 Bills First When Money Is Tight)

4. Making the minimum payments on everything

Financial institutions love people who only make minimum payments. There are two broad terms used for credit card customers — "transactors" and "revolvers" — and the latter are adored because they never pay off their balances.

Transactors pay off their credit card bill in full at the end of each month, taking advantage of points and rewards without having to pay interest. Revolvers, on the other hand, regularly run balances. For those who only make minimum payments, interest makes it almost impossible to get a foothold on the original balance. (See also: All the Ways Minimum Payments Are Evil)

If you find yourself making only minimum payments on everything, consider a debt snowball approach. Find the debt with the lowest balance, send as much money as you can to it, and continue making minimum payments on your other accounts. When that small debt is paid off, apply the extra amount you were paying to the next largest debt, and so on, until it all snowballs and your debts are paid in full.

Paying off small debts first may cause you to pay more interest in the long run, but the psychological satisfaction of checking off a debt can be powerful motivation to keep going. (See also: 6 Secrets to Mastering the Debt Snowball)

5. Maxing out every card and loan you have

When you get a new credit card, it comes with a spending limit. When you combine the credit limits of all your cards, and compare that number to the amount you have borrowed, you'll get a figure called a credit utilization ratio.

Let's say you have $10,000 of available credit, and you currently owe $2,000 spread out across your combined credit cards. You have a 20 percent credit utilization ratio, and lenders like to see that. It means you're being careful with your money and not running up balances. Most experts recommend you try to keep this ratio below 30 percent. Even better if you can keep it below 10 percent. (See also: This One Ratio Is the Key to a Good Credit Score)

If you're maxing out all of your credit cards, and you're hitting 80 to 90 percent of the credit you can borrow against, your credit utilization ratio is too high (especially if it's a six-figure credit limit). This tells any potential lender that you're a risk, and you likely won't be approved for any new lines of credit. If you are, it will come with sky-high interest rates.

6. Buying things you don't need while debts go unpaid

You should really be paying down the credit cards, or that electricity bill that's a few months overdue. But the jacket you've been eyeing is on sale right now, and you won't get another shot at a bargain like this. You put the bills off a little longer, and go for the jacket.

This kind of mentality traps us all at some point, especially if we're feeling down and would rather spend the money on ourselves than give it to the bank or the utility company. Once again, the brutal truth has to be addressed. Spending money on stuff you don't need and cannot afford, while letting interest pile up on your debts, is a one-way ticket to bankruptcy.

7. Counting on a stroke of good fortune to solve your problems

We all do it. There's no harm in dreaming about winning the lottery, or finding a valuable piece of jewelry or artwork in the attic. But there's a big difference between dreaming of a windfall, and depending on one to get you out of debt.

It can be dangerous to think this way when you have money woes. That last $20 in your pocket goes to Powerball tickets or scratch cards, rather than buying food or paying a bill. The odds are not in your favor, and you may as well throw the $20 in the trash. And yet, the fantasy of winning thousands, or even millions, is hard to ignore. For a while, you feel like you might get lucky — but when the dust settles, you now have $20 less to your name.

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7 Warning Signs You're In Debt Denial

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