Dubai: Financial therapists often describe denial as the go-to coping mechanism when it comes to dealing with money-related stress, which they also agree is ultimately destructive.
“Money can certainly trigger denial,” said Dubai-based money coach Mirin Raul, while adding, “There’s no shortage of people in denial about their financial situation in this day and age.
“Financial denial is when you stop paying attention to your finances, you don’t track them and you don’t open your statements. It’s a way to deal with stress — you feel better (about your debt) because you’re not thinking about it.”
Money can certainly trigger denial, there’s no shortage of people in denial about their financial situation in this day and age
– Mirin Raul
Although now a commonplace, debt can be scary too
While debt has become commonplace with the frequent use of plastic or an endless line of credit, debt can also get pretty scary when chrometophobia takes this ordinary fear of money and spending to the next level.
What is chrometophobia?
Chrometophobia is an irrational fear that can make it difficult for you to spend money or pay your bills, even though you may be able to afford it.
“Being in debt, especially when the amount you owe is unmanageable, can feel worrisome. But if you are unable to determine how much you really owe, it can be even more troubling,” said Abu Dhabi-based financial planner Andrea Barber, who also coaches people on money-related issues.
“In such a situation, one should also not be looking for quick fixes. For instance, while consolidating your debt with loans can feel great and help your credit rating, but it’s only a bandaid unless you deal with why you got into debt in the first place.”
Knowing the difference between ‘good’ and ‘bad’ debt
In order to address this problem of being in denial, knowing the difference between ‘good’ and ‘bad’ debt is vital, experts say. But did you know not all debt is bad? The good kind of debt helps generate income and increases your net worth, and also helps you build a credit history, while ‘bad’ debt doesn’t.
What is the difference between ‘good’ and ‘bad’ debt?
‘Good’ debt is defined as money owed for things that can help build wealth or increase income over time, such as student loans, mortgages or home loans or a business loan. ‘Bad’ debt refers to things like credit cards or other consumer debt that do little to improve your financial outcome.
How do you tell if you have ‘bad’ debt? “Some signs of having bad debt are paying bills late, bouncing cheques, paying only the minimum due on a credit card bill, using an advance from a credit card to pay a bill, or even asking friends for a big loan,” said Rupesh Naish, a debt consultant based in Dubai.
“While having ‘good’ debt is beneficial, being without ‘bad’ debt sometimes requires difficult choices. But reducing your debt load will help you gain control of your financial life so that you can reach your long-term goals.”
Being in debt, especially when the amount you owe is unmanageable, can feel worrisome. But if you are unable to determine how much you really owe, it can be even more troubling
– Andrea Barber
How do you even know that you are in ‘debt denial’?
“You might be in ‘debt denial’ if you make excuses for why you have debt or compare your amount of debt to other people’s debt load,” explained Raul.
“You can also be in denial if you shuffle debt from one source to another while claiming that you are making regular debt repayments or keep overspending and using credit even though you’re heavily in debt.”
So while it’s sometimes easier to or minimise 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. The key, money coaches say, is to learn to know the warning signs before denial kicks your finances where it hurts.
5 warning signs to watch out for to find out if you’re in ‘debt denial’
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,” said Naish.
“There can be certain exceptions to this. A low-interest loan to pay off high-interest debt can be a smart way to minimise interest payments, so long as it is paid back quickly. However, even with these strategies, you must be very careful.”
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,” added Barber.
“It’s important that you keep a record of everything you earn and save, and what 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, and you have enough left over to start paying down your debts.”
If you ignore budgeting and just try and wing it month to month, you could be in serious ‘debt denial’
– Andrea Barber
3. The number of unpaid bills keep increasing
Experts say that a major red flag that signals ‘debt denial’ is refusing to even acknowledge what you owe, and how soon you owe it.
“By letting your unpaid bills grow, 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,” said Raul.
“Attack 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. If you are scared of looking at your bank or credit cards statements, that’s another warning sign of ‘debt denial’.”
4. Making the minimum payments on every debt
When people only make minimum payments, financial institutions are the ultimate gainers. There are two broad terms used for credit card customers — ‘transactors’ and ‘revolvers’.
What is the difference between ‘transactors’ and ‘revolvers’?
While ‘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’ regularly run balances.
“For those who only make minimum payments, interest makes it almost impossible to get a foothold on the original balance. If you find yourself making only minimum payments on everything, consider a ‘debt snowball’ approach,” said Naish.
In this approach, you 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,” added Naish.
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
– Rupesh Naish
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 utilisation ratio.
“Let’s say you have Dh10,000 of available credit, and you currently owe Dh2,000 across your credit cards. You have a 20 per cent credit utilisation ratio, and lenders like that,” said Barber. “It means you’re being careful and not running up balances. It is recommended to keep this ratio below 30 per cent.
“If you’re maxing out all of your credit cards, and you’re hitting 80 to 90 per cent of the credit you can borrow against, your credit utilisation ratio is too high. This tells any 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.”
When it comes to managing our money, we face so many stressors on a regular basis — like, dealing with a surprise car repair and medical bills, to budgeting our salaries to keep up with fluctuating bills.
However, anxiety over our finances can manifest in all sorts of ways, and at times, it can even become debilitating to the point where it’s difficult to go through our day as it relates to our money.
This is when being in denial of debt creeps up. Although worrying about not having enough money is an example of financial anxiety, experts evaluate how that’s not the only instance of experiencing it.
Financial anxiety can also occur when you obsess over saving every single dirham, become hyperaware of where your money is going or you imagine situations where you lose all your money
– Andrea Barber
“Financial anxiety can also occur when you obsess over saving every single dirham, become hyperaware of where your money is going or you imagine situations where you lose all your money,” added Barber.
To put it briefly, how can you curb financial anxiety or ‘debt denial’? To start curbing your financial anxiety, identify what’s causing your stress in the first place, experts add.
“If your financial anxiety and the resultant ‘debt denial’ stems from a money mistake you once made, try to avoid harping on what’s already done and instead look forward to fix it,” added Barber.
Once you have a full picture of where your money is going every month, you can look for opportunities to redirect some of it to the areas causing your financial stress, and eventually what made you go into denial mode.