5 signs you have a spending problem

Everyone has gone over budget at one point in their lives. Whether shopping for back-to-school clothes for the kids, picking up groceries for the week or splurging while on vacation, overspending is bound to happen every now and then. However, if you notice you’re becoming more of a shopaholic and less of a frugal shopper, you might have a spending problem you need to address before it’s too late.

“Overspending is harmful because it could be a sign you’re out of control with your finances,” said Leslie H. Tayne, an attorney who concentrates in debt resolution solutions and author of “Life & Debt.” And she’s right. Your overspending might be making it hard to pay bills, save money for emergencies and prepare for the future. It could also lead to more serious financial consequences, such as bankruptcy, and you might even need credit repair down the line.

Here are five red flags that indicate you might have a spending problem or shopping addiction, as well as tips on how you can keep your spending under control.

1. You max out your credit cards and pay only the minimum.

If you’re maxing out your credit cards and can’t pay off your balances every month, it’s a sign you’re relying on credit to supplement your income, said Tayne. Not only can maxing out your credit cards hurt your credit score, but it can also leave you in debt longer than necessary.

“This is a hard cycle to break, especially if you can only afford to make the minimum payments each month,” she said.

If a high percentage of your available credit is used — in other words, most of your cards are maxed out — the credit scoring agencies consider this a sign that you’re overextended and will likely lower your credit score. A lower score will make it harder for you to get additional credit and might force you to pay higher rates on that credit.

Paying the minimum on your credit card won’t necessarily hurt your score, but it could take you a long time to pay off your debt and cost you extra money in interest. For example, if you had a $1,000 balance on a card with a 16.00% APR and made a minimum monthly payment of $25 on your balance, it would take nearly five years to pay off your debt. And, you’d pay about $440 in interest.

Practice this tip: Consider adopting a cash-only policy the next time you go shopping to avoid using your credit cards and going over your credit limit. Leaving your credit cards at home will force you to stick to a budget and control your spending.

2. You pay bills late.

About one out of 20 people with a credit file are at least 30 days late on a credit card or a non-mortgage account payment, according to an Urban Institute report released in 2014.

Paying bills late because you don’t have the cash to cover them is a sign you’re overspending, said Tayne. And it sends a red flag to your credit issuers, which could hike your interest rates or lower your credit limit, according to the National Foundation for Credit Counseling. You’ll also be hit with fees — which can add up quickly — and several late payments will hurt your credit score.

If you’re more than 180 days late on a payment, your debt typically is assigned to a collection agency or debt collector. Having debt in collections can lower your credit score and will generally remain on your credit report for seven years, according to myFICO.com. What’s worse is that your creditors or debt collectors can sue you and be allowed to garnish your wages to pay the debt you owe, according to the Federal Trade Commission.

Practice this tip: Before you spend any money on discretionary expenses — clothes, entertainment, etc. — pay all of your bills for the month first. And to avoid missing due dates, see if you can set up automatic payments for every bill, including utilities, rent, car payments and more.

3. You raid your retirement account.

You might think there’s no harm in borrowing from your retirement account because it’s your money. After all, you can borrow up to half of your 401k balance — up to a maximum of $50,000 — but Tayne said this is rarely a good idea. “Borrowing from your future is a risky move,” she said.

If you borrow from your retirement account, you’re shortchanging your retirement savings and might retire with a smaller nest egg. Also, you might contribute less to your retirement plan. In fact, 24 percent of 401k borrowers decreased their savings rate in their first year after taking out a 401k loan, according to a Fidelity study of 401k loans taken from 2007 to 2013. This includes the 9 percent who stopped making retirement contributions altogether after taking out a loan.

Practice this tip: If your compulsive shopping habit is forcing you to raid your retirement account, open a savings account that’s used solely for fun. In addition to setting aside money in a retirement account and emergency fund, you can put a small portion of your paycheck in this account each month and use those savings to treat yourself once in a while. But remember: Bill payments, retirement contributions and emergency fund savings should always be prioritized.

4. You use payday loans.

It’s certainly a sign that you’re overspending if you have to rely on payday loans, said Tayne.

Although these short-term loans might be seen as a way to cover the cost of an unexpected expense, most people who get payday loans use them to cover everyday living expenses, according to a 2012 report by The Pew Charitable Trusts.

Unfortunately, these loans come with a high cost. Payday loans come with extraordinarily high annual interest rates — some APRs are as high as 391% to 521%. And, payday lenders will let you roll over the balance of a loan for a fee if you can’t repay the full amount when it’s due.

Consider this example from the Consumer Financial Protection Bureau: Let’s say you roll over a $300 payday loan three times with a $45 fee before you repay the loan. You will end up paying four $45 fees and still owe the $300, which means you would have to pay back a total of $480.

Practice this tip: If your compulsive buying has forced you to take out a payday loan in the past to cover living expenses, don’t let it happen again. Instead of resorting to payday loans, consider these alternatives for quick cash.

5. You borrow from friends and family.

If you have to turn to friends and family for money, it’s a sign that your overspending has left you financially strapped, said Tayne.

Although it might seem like a good way to get an interest-free loan, “being unable to pay back the loan can lead to tension and can ruin your relationship,” she said. Think about it: How would you feel if you gave a friend or family member a few hundred dollars but never got those funds back? Don’t risk your relationships because of a spending problem.

Practice this tip: Besides resisting the urge to ask for money from friends and family, you also need to practice saying “no” if your loved ones tend to offer you money when they know you’re short on cash. But, of course, it’s usually hard to say “no” to free money.

If you know your mom or best friend will never hesitate to open their wallets for you, have a talk with them. Tell them about your spending problem, and ask them to help you stay within budget by keeping their wallets closed. If you can’t say “no,” teach them how to.

More Tips to Quit Your Overspending Habit

If you’ve realized that you have an overspending problem, rest assured — there are different ways you can get your spending habits under control and create healthy spending habits:

• Create a budget. The first step to getting your spending under control is to create a budget, said Tayne. Take a close look at what you’re spending money on, and look for ways to cut back.
• Use debit instead of credit. Similar to living on a cash-only budget, relying only on debit can curb compulsive shopping and overspending. Just make sure you don’t fall into the trap of continuously transferring more money into your checking account while shopping. That defeats the purpose of bringing only a debit card.
• Get help. If you’re buried in debt and can’t curb your spending, your best option might be to get professional help. The National Foundation for Credit Counseling has certified consumer credit and debt counselors that can help you solve your financial problems. Visit NFCC.org for more information.

From GoBankingRates.com: 5 signs you have a spending problem