Are There Warning Signs Showing You Have Too Much Debt?
It has been said that there are two certainties in life — death, and taxes. If you’re like millions of other Americans, you can add debt.
As of 2021, American household debt just broke past the $15 trillion mark. As well, student loan debt is at an all-time high of more than $1.5 trillion, according to Education Data.
Besides these worrying statistics, the mean credit card debt among American households is also higher. Based on Value Penguin’s statistics, the average household debt is a bit over about $6,000.
In short, debt is ubiquitous, and it’s almost a regular part of daily life. However, how can you tell if your debt is a problem? What are the warning signs of debt?
We answer these questions and more. Read on to learn more about whether or not you have too much debt and how you can distinguish the good kind from the bad kind.
Debt That’s OK to Have vs. “Bad” Debt
Granted, all debts are liabilities you need to pay at some point — whether it’s a student loan or a mortgage. Consider this the bad news. The good news is that not all debts are equal. Some add value to your net worth. Others are simply reflections of your tendency to live lavishly and beyond your means.
Good Debt: Student Loans, Mortgage, Business Loans
What separates good debt from one that’s considered bad is its ability to add to your net worth. Good debt is also incurred from paying for things that allow you to improve or maintain your financial status.
This is why a student loan is a “good” liability to have. A student loan is one of the reasons you have a diploma that enables you to get a job. More than the career opportunities it enables you to have, a student loan contributes to your personal development, having long-lasting value.
A mortgage allows you to own a home. With time, you’ll be able to build equity as long as you don’t default.
A business is always a good thing to start after you’ve done your research on the market. If you borrowed money for capitalizing on your venture, it’s a loan that can be deemed an investment.
Make no mistake. Good debt is still a debt. Rather than thinking of it as something you shouldn’t have had, think of it as necessary. It’s the next kind of debt you should avoid as much as possible.
Bad Debt: Credit Card Debt
You incur bad debt from buying items on credit. Usually, the items you purchase on credit don’t add much to your net worth. For example, using your credit card on a luxury vehicle doesn’t add value. It’s likely an impulse buy, and any vehicle depreciates over time.
Bad debt in the form of credit card debt can also be the result of purchasing too many household items. While household items are necessities, a budget based on spending available cash needs to guide purchases. Buying more items with your credit card will add to the bills you need to pay every month.
Too much bad debt is a reflection of bad budgeting and poor prioritizing. Too much of this is a red flag when it comes to your financial standing and security.
Debt Warning Signs
Debt is a normal part of life for virtually everyone in the country. According to Shift Processing, eight out of 10 Americans are likely to be in debt.
With debt being as common as it is for everybody, it’s almost normal. However, debt can easily go from manageable to out of control. You’ll know that you’ve passed the threshold if you see any of these warning signs:
You’re Unable to Save Any Money
One of the first signs that you have too much debt is an inability to save money. If you’re using most of your income to pay debts monthly, you’ve got too many liabilities.
Of course, a sign of too much debt doesn’t always have to be a zero bank balance at the end of each month. According to Bank Rate, if your debt payments are around 50% more than your paycheck, you’re already too deep in debt.
You Can’t Get a Loan or Qualify for a Credit Card
Debt doesn’t automatically disqualify you from getting a loan. In fact, most lenders would still consider giving you a loan if your debts have a minimal effect on your finances.
Lenders like banks will determine the impact of your debts in several ways. One way is to calculate your debt-to-income ratio. According to the Consumer Finance Protection Bureau, your debt-to-income (DTI) ratio is calculated by dividing your debts (good and bad) over your income.
The resulting figure will indicate whether you’re financially capable of paying a loan or are under financial stress. According to Investopedia, any figure above 0.4 will signal financial stress. Financial stress is a sign of too much debt, and lenders will pick up on this.
You’ve Maxed Out All Your Credit Cards
Barring a spending compulsion, maxing out all of your credit is due to one thing — you can’t pay in cash. The absence of available and spendable cash signals that you’re not making enough to pay off debts and make simple purchases.
The less cash you have due to debt payments, the more you’ll need other ways to pay for things. With no cash, you’ll likely use your cards — often until they max out.
Now, you might be thinking that you can always just get another credit card. This conveniently brings us to the next red light of too much debt.
You’re Unable to Open New Lines of Credit (e.g., Credit Cards)
Credit card companies take into account your financial capacity to make monthly payments. Like lenders, they’ll determine this using DTI ratio calculations among other financial standing indicators. Once they find out that you’re in too much debt, they won’t issue you a credit card.
Your Bank Balance Hovers Just Around $0
This ties in with the first signal that you’ve got too much debt. This is especially the case if you’ve set up your payments on auto-debit.
If you aren’t seeing more than two digits on your bank account, chances are you’ve been paying too many debts. While there’s nothing inherently wrong with this, it should be a wake-up call to seek help or find other ways to make money.
You’ve Only Been Making Minimal Payments
Debt can cause you to skimp or minimize spending even in areas where you shouldn’t. One of the areas in which you shouldn’t have this approach is towards your monthly utilities.
Usually, electric and water bills have minimum payable amounts if you can’t make the full payment. Having to do this a couple of times a year shouldn’t concern you too much. However, if you’ve been making just minimum payments year-round, it might be because you’re paying off too many debts.
Creditors and Lenders are Calling You Left and Right
Unless there’s been a system error on the side of your lenders or creditors, receiving multiple calls from them is a sign that you haven’t paid. It’s also a sign that you’ve been unable to pay despite being granted a grace period.
When your phone is going off with calls from creditors, it’s only because you have too many unpaid loans or credit card debts.
Your Debt Balance Remains Unchanged Even if You’ve Made Payments
What if you have paid some of the payable amounts off but still see the same debt balance? If this is the case, then it’s indicative of delayed payments.
Delays in payment will usually incur an accumulation of interests. In other words, as you pay towards the principal amounts of your loans or cards, the delays will have caused the interest to pile up. Often, long-accumulated interests end up amounting to nearly the same amount as the principal.
Your delay in paying will likely be due to debt. After all, you can’t pay for too many things if you owe a lot of money as well.
If You’ve Got Too Much Debt, It’s Not Too Late
Debt can take a serious toll on you. You need to recognize when it’s starting to take over your life. If you find your finances spiraling out of control, know that there’s help available.
