How to stay out of the financial red zone

On the eve of a recession, the last place you need to be is in the financial red zone.

Lenders get stingy with credit and cash is king, leaving cash-strapped, credit-addicted consumers up the creek without a paddle.

Are you in the financial red zone?

Here's how you can tell and what to do. The tips are based on a discussion with Gail Cunningham, spokeswoman for the National Federation for Credit Counseling, a trade association based in Maryland.

You're in the financial red zone if:

- You normally pay only the minimum amount due on your credit card bills.

People do this and think they're successfully managing their credit if they never incur a late fee. But, "they will never reduce their debt," she said.

The average American household has $9,000 of household debt.

Let's say a family gets sick of its debt and cuts up its credit cards. It stops charging and starts making minimum payments of 2 percent of the balance every month.

At 18 percent interest, it will take that family 47 years to pay off the debt, Cunningham said. They will have paid $32,994 — $23,994 of it in interest.

Were all those pizzas, DVDs, electronic gizmos and movies worth it?

"No one would ever get into that cycle of only paying the minimum amount due if they knew the real picture," Cunningham said.

- Your credit card balances increase each month.

You apparently refuse to stop charging, even though you swear up and down that you want to be debt free. "You're just going in the wrong direction," Cunningham said.

There are arguments in your home about money. That's a sure sign of financial distress. Financial discord rips apart marriages.

- You sometimes hide purchases from your spouse.

"We call that financial infidelity," Cunningham said. "You're not being forthcoming. You have another life that you're hiding from your spouse. That's an obvious red flag. You need to sit down with your spouse and have the difficult discussion about money. Get it out on the table."

- You frequently charge items that you used to pay for with cash.

If you're doing this because you want to rack up rewards points, that's one thing.

You can win at the rewards-card game if you pay off your bills each month, Cunningham said. But, if you're doing it because you're cash poor, it's highly unlikely you'll have the money to pay off your bills.

- You have thought about filing for bankruptcy.

Bankruptcy is the right decision for some people, but it needs to be the last resort.

Also, a year ago consumers might have found their mailboxes stuffed with credit offers after a bankruptcy case was finalized.

But in a recession, "because there's a credit crunch, credit will be extended only to those who are creditworthy."

- You have begun using cash advances to meet your obligations.

Cash advances, often in the form of convenience checks sent by a card issuer, cost a bundle. You'll pay sky-high interest, sometimes more than 20 percent, and hefty fees, say, 5 percent of the check amount, if you cash them.

If you're using cash advance checks to pay for your lifestyle, you need to stop in your tracks and get help, Cunningham said.

"You're digging yourself into a very deep and serious financial hole."

- Most of your credit cards are near the limit, so you've begun applying for new lines of credit.

"If you've already maxed out your credit cards, you're not a likely candidate for new credit," Cunningham said. "You are amassing a tremendous debt burden that you're not likely to be able to service."

Do the scenarios above mirror your credit life? You're in the red zone. Get some free credit counseling and get on the right track.

Call ClearPointe Financial Solutions Inc. (877) 422-9044; Housing Opportunities Made Equal (804) 354-0641; or National Federation for Credit Counseling's hotline (800) 388-2227. Check out www.debtadvice.org.