At a Glance
It seems that debt has become an accepted part of life, with many people using debt to buy houses, cars, education, and more. But there’s a big difference between carrying a healthy amount of debt and owing too much.
What Can Happen If You Have Too Much Debt?
If you have too much debt, it can cause a domino effect, knocking down other pieces of your financial life with it. Struggling to meet monthly debt payments means you may not have money for emergency savings, retirement investing, or simply paying monthly bills. And ultimately, too much debt can cause you to borrow more, putting you in an endless cycle of debt that’s almost impossible to get out of.
Here are 5 warning signs that you may be carrying too much debt.
1. You Aren’t Sure How Much Debt You Have
There’s no clearer indication that you’re carrying too much debt than not knowing how much you have. And it’s next to impossible to start a successful debt repayment plan without knowing where to start. If you think you may have too much debt, start by listing out every debt you currently owe. Don’t forget to include the:
- Amount you owe
- Minimum monthly payment
- Interest rate
You can then use the total amount of debt to assess your debt-to-income (DTI) ratio, which is a value used by lenders in assessing your ability to take on further debt. To calculate your DTI ratio, combine your total monthly debt payments and divide by your monthly income, which you can find by taking your pre-tax annual salary and dividing it by 12.
Lenders typically gauge a DTI ratio of less than 35% to be excellent, between 35-45% acceptable, and over 45% an indicator that you may be maxed out on your capacity to handle further debt.
Related: Guide to Understand Debt & Its Types
2. You Can Only Afford Minimum Payments
When you accumulate too much debt, you may feel like you only have enough money to pay the minimum amount due on each account. But paying only the minimum means you’re bound to pay much more in interest over time and pay off your debt for longer.
If you’re managing multiple credit card debts, you may want to consider debt consolidation through a credit card balance transfer or debt consolidation loan. This is a quick way to save money on interest if your good credit score qualifies you for the best rates. Otherwise, you’ll need to find ways to increase what you earn.
Look at boosting your income by changing jobs, asking for a raise, or picking up a side hustle. Then, once you’re earning enough to pay more than the minimum due, choose a repayment strategy like the debt snowball (which focuses on the smallest loan first) or the debt avalanche (which focuses on the highest interest rate first) to get you rolling on the path to debt freedom.
3. You’ve Been Denied for a New Line of Credit
Lenders view your credit utilization as a measure of your ability to repay debt. Credit utilization is the ratio of how much debt you currently have vs. your total available credit. When you have too much debt, your credit utilization will likely be higher than what lenders view as an acceptable number. And that means creditors may be wary of loaning you more money or increasing your credit limit.
4. You Aren’t Being Truthful About Your Debt
If you find yourself glazing over poor spending habits or trying to hide the amount of debt you’ve accrued, it might be a sign it’s time to get help. Especially if you share finances with a partner, coming clean about your debt can help put you on the path to changing your financial situation. There are also professionals like financial counselors or non-profit credit counseling services that can help you for low or no cost.
5. You Don’t Have Savings
When all of your money is going toward debt payments, it’s near impossible to save. But starting an emergency fund is one of the first steps to getting yourself out of debt for good. Without a financial buffer, you’re destined to continue to use debt to fund minor expenses as they crop up. An emergency fund can be used for those inconveniences, so you don’t need to lean on debt to do so.
The Bottom Line
There are several warning signs that you may be in over your head with excessive debt. If you recognize any of these signs in your life, it might be worth putting a debt repayment plan in place to try and get your debt in a more manageable spot. Of course, getting out of debt is a journey that may take months or years, depending on how deep you’re in. But the feeling of being debt-free will be well worth the time it takes.