Struggling to make the minimum payments on your credit card? Denied a loan you need? These are just the tip of the iceberg when it comes to signs that you have a debt problem. Too much debt can cause an avalanche of issues in your life, but you may not even realize you have a debt problem until faced with the harsh reality of a credit score that’s too low to take out a loan or an emergency expense that wrecks your financial health.
Instead of being blindsided by the problems deep debt causes, learn the signs you have a debt problem and what you can do to get out of debt before it’s too late.
How much debt is too much debt?
Not all debt is bad, but being in over your head to the point where you start experiencing the warning signs of deep debt can be troubling. While having too much debt can certainly cause problems, it’s true that having some debt is normal and actually, considered by most finance experts to be financially healthy.
“Personal debt often carries a negative connotation, but in truth, virtually all American consumers need debt to both achieve their long term planning goals and manage their daily finances,” John H. Robinson, a financial advisor and owner of Financial Planning Hawaii says. “Mortgage debt is what enables us to finance a home purchase while home equity loans and reverse mortgages allow us to monetize the equity in our homes. Installment loans enable us to finance big ticket items such as a college education or an automobile. It is difficult to imagine how modern commerce could function without revolving credit card debt.”
So, how much debt is too much debt? There are two tangible numbers to look at that can help you identify whether you have too much debt: your debt-to-income ratio (DTI) and your credit utilization percentage. “Generally speaking, a DTI of under 35% is considered healthy,” Robinson says. “A DTI of 43% is regarded as the highest ratio a borrower can have to still qualify for a conventional mortgage.” Calculating your debt-to-income ratio is a great first step in determining whether or not you’re carrying too much debt.
“If you’re talking about credit cards, a 30% credit utilization ratio is considered the upper limit of normal,” Samuel K. Swenson, CFA, CPA, CFP, a financial planner with CGN Advisors, LLC, says. “Use more than that, and your credit score might take a hit. In the end, the only healthy debts are the ones you can adequately service and have a plan to pay off within a reasonable amount of time.” To find out your credit card utilization, simply divide your credit card balance (the total amount outstanding) by your total credit card limit.
Before you can fix your debt problem, you must recognize the problem
While your DTI and credit card utilization can be concrete indicators of too much debt, there are a variety of other warning signs to look out for.
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Staying aware of these potential signs you have a debt problem can help you take steps to fix things before they spiral out of control:
1. You’re unable to make minimum payments
One of the first signs that you have a debt problem is that you can’t make the minimum payments on outstanding debts. This could be student loan payments, credit cards, home loans, or any other type of personal debt. Setting up automatic payments is one way to thwart this issue, but if there’s no money on-hand to do so with, you’ll want to investigate some of the bigger debt management strategies listed below.
2. Your credit score is low or falling
According to Robinson, when someone has a debt problem, “early signs may come in the form of steadily declining credit scores.” However, he does note that, “the root causes [of a declining credit score] may include the inability to pay credit card balances in full each month and occasional missing or late payments on credit cards, installment loans, and/or mortgages.” Generally, a FICO score under 580 is considered poor credit, but scores in the fair credit range (580-669) can indicate poor financial health and lead to debt problems.
3. You’re denied loans or credit cards
If you apply for a new credit card and are turned down or want to take out a loan and can’t find a lender to take you on, you have a debt problem. “Aside from the emotional impact that comes with a high debt burden, you will likely have difficulty borrowing money whether it’s for a mortgage or a credit card,” says Swenson. Prior to being turned down for a loan, you may be offered a steep rate if your debt is trending toward deep debt territory. This is likely related to a low credit score, so keeping an eye on that number and improving it is the first step to recovering from this debt issue.
4. You rely on cash advances to pay bills
Though it’s sometimes necessary to obtain cash quickly, reliance on cash advances can signal a deep debt problem as it means you don’t have the cash flow to pay what you owe or buy what you need. “Using credit card cash advances, balance transfers, and/or pay-day cash advance loans to make debt payments may signal more advanced debt problems,” Robinson explains.
5. Debt collectors are knocking at your door
Perhaps they’re not literally at your home, but if you’re getting phone calls and letters from debt collectors, this is a sure sign that you have a debt problem. Debt collection can impact your credit score and affect your ability to take out loans, so it’s important to keep this problem in check.
6. Your debt is causing relationship problems
Hiding your money problems from your spouse, not being able to openly discuss your debt with your partner, or outright lying about the state of your financial health is a huge indicator that your debt is a problem. Whether you make up excuses not to talk about your debt or constantly fight about the state of your debt, this sign you have a debt problem is one to pay close attention to.
Related: Love & Debt Survey
7. You avoid paying (or even looking at) your bills
If you can’t bear to open a credit card statement or turn the notices off to your monthly payment reminders so you can “forget” about your obligation, this avoidance is a definite signal that you have a debt problem. The first step to solving a problem is admitting you have one, so avoiding your debts won’t do anything toward paying them off.
8. Your credit cards are maxed out
If you go to use your credit card and are declined at the point-of-sale, this could be an early indicator of a debt problem. Pulling out one credit card after another at the register to find one that isn’t maxed out is a sure signal that you’re spending more than you can afford. Getting out of credit card debt isn’t always easy, but it’s necessary to pull you out of a potential debt spiral.
9. You can’t make ends meet
If you can’t make it from one payday to the next without borrowing money (whether from friends, relatives, or a cash advance) because the debts you’re paying off are eating up all your net income, you have a debt problem. “With too much debt, you might find it difficult to manage your finances adequately,” Swenson explains. If you’re putting everything you have toward debt payoff but can’t afford to maintain your current standard of living, it’s time to reassess how you’re paying your debts.
10. An emergency drains you financially
In paying off debt, you may neglect to add money to an emergency fund if money is tight. If you find yourself in an emergency or facing an unexpected expense that drains your savings, maxes out your credit cards, or you take out a payday loan to get the cash you need, it could be because of a debt problem. Having an emergency fund is essential to financial health, so you should take steps to ensure you budget for this in addition to debt payoff.
11. The amount of debt you have is worrisome
Swenson explains that if “you’re generally bothered by the amount of debt you currently have, regardless of the amount,” you have a debt problem. You should feel comfortable with what you owe and the payments that you’re set to make toward paying off your debt. If you can’t stand to face your finances or sit down to make a budget because the amount of debt you have is overwhelming, this is one indication that your debts have become a problem.
12.You don’t have money to grow your assets
If you have a debt problem, “you might also have difficulty growing your assets, including your employer retirement plan and other investment accounts,” Swenson says. “When much of your income is eaten by debt repayments, there often isn’t much left over for other opportunities.” No matter what investment strategies you use, you have to have money to put toward them to see them through to fruition. To do this, Swenson advises to take on less debt than you think you can handle.
How to fix your debt problem?
If you do have a debt problem — even if it’s bigger than you realized — not all hope is lost. “Before going into a panic, recognize the need to create a plan,” Swenson says. “There are many ways to consolidate debt at low interest rates and take control once and for all. If you’re able to create a plan that involves debt consolidation, a single monthly payment, and a strategy to decelerate your spending, you’ll be able to find your way out.”
You can also consider options for refinancing, earning additional income, and various budgeting methods to help get you through. Above all, sit down and write out all your debts, including the outstanding amount, interest rate, and monthly payments, to get an idea of where you’re at. You can see what you owe and put it up against your net income and other expenses (food, clothing, etc.) to know what you’re working with. “If you have a written plan, the chances of accomplishing a particular goal increase dramatically,” Swenson advises.
For debt problems that are already spiraling out of control, you may need to seek expert help to avoid extreme consequences like personal bankruptcy and even homelessness. “If the debt mountain seems insurmountable, it may be time to reach out to a financial advisor with expertise in credit counseling,” Robinson says. They can help you work a debt payoff plan if you’re overwhelmed or unsure where to start. “In the most extreme scenarios, it may also be wise to reach out to a reputable debt solutions/settlement company,” Robinson adds. “These companies may work with your creditors to negotiate lower interest rates or even the forgiveness of some portion of your debt in order to help you regain control over your personal finances and avoid filing for personal bankruptcy.”