There is a difference between “good debt” and “bad debt.” However, how do you know when it becomes a problem? If you have any of these habits, then it may be a sign that you have too much debt.
10 Signs That You Have Too Much Debt
1. You aren’t saving any money.
Learning to save money is the first lesson in money management. It’s an important skill for both your immediate needs and long-term financial goals. Therefore, you should be putting a little away every month in your emergency fund, retirement, or other savings accounts.
However, if you aren’t able to put any money into savings, this is a sign that you have bigger problems than making it til the end of the month. For those who struggle to save, it’s time to evaluate your budget and spending habits. You must learn to live below your means to avoid going further into debt.
2. Credit cards cover all your expenses.
Another sign that you have too much debt is if you rely on credit cards to cover all your expenses. Credit cards can help you build your credit history, but they can also ruin your finances if you don’t know how to use them.
Unfortunately, this debt carries the highest interest rates, usually above 20%. In the end, you pay more in interest fees, it negatively impacts your credit score, and it could affect your ability to obtain loans. So, it’s wise to only use them if you can pay off the balances every month or as a last resort when there is an emergency. Otherwise, you are setting yourself up for financial failure.
3. You only make the minimum monthly payments.
Many people are not concerned about their debt as long as they can make their payments each month. However, if you’re only making the minimum payments, you’ll never get out of debt. Their fees are designed to keep you locked in the debt cycle, sometimes paying double the principal in interest fees.
Most advisors will tell you to prioritize paying down these debts. If you aren’t able to pay off your balance each cycle, then put as much toward the principal as you can. But if you never pay more than the minimum, it could keep you buried in debt for years to come.
4. It has become a habit to use one credit card to make payments on the others.
Balance transfer offers can be an effective way to eliminate interest fees and pay down debt. But, you shouldn’t rely on credit cards to stay afloat. Furthermore, you don’t want to take on new debts to pay off outstanding ones. So, if you are rotating balances between credit cards, it’s a red flag that you have too much debt.
Making payments with one credit card for another is a delicate balancing act. This isn’t a gamble you want to take with your future.
5. Your credit cards are maxed out.
It’s embarrassing when a card is declined at the point of sale or you have to pull out another card to pay. Although it does happen occasionally, it shouldn’t be a regular occurrence. If your credit cards are maxed out, it could indicate that your spending is out of control.
When your credit cards are consistently maxed out, it increases your credit utilization which lowers your credit score. There is also a greater risk of defaulting on your payments and having them sent to collections. It will also make it difficult to obtain a loan when you need one.
6. You have had several cash advances.
Cash advances can save you in an emergency. But, they are possibly the least beneficial way to use your credit card. In addition to the high fees and interest rates, they leave you with less money in the end.
If you have had several cash advances in recent months, this most likely means that you need a better system to manage your money. Start an emergency fund or seek a financial advisor so unexpected expenses and poor spending habits don’t hold you back.
7. Your total debt is more than half your income.
Your debt-to-income ratio is an important factor in your finances. It provides a tangible measurement of how much debt you carry in comparison to how much you make. A high ratio is one of the clearest signs that you have too much debt.
Creditors look for a ratio of less than 36% when they offer loans or lines of credit. But the lower the ratio, the better. So if yours is half your income, it will be nearly impossible to obtain funding. It also leaves you with less flexibility in your finances since your income is tied up in debt repayment. The only way to address this issue is to lower your debt-to-income ratio and get out of the debt stranglehold.
8. Lenders deny your application.
Credit applications get rejected for many reasons. But if you are regularly getting turned down by lenders, it’s time to figure out why.
Look into your credit history to ensure that are no errors or inaccurate information that are impacting your score. However, if it is the result of poor financial management and bad spending habits, seek expert advice to make a plan and help you improve your situation.
9. There are several creditors and agencies calling to collect.
Mistakes happen and bills sometimes go unpaid. When this occurs, creditors will call to collect after enough missed payments. But, you don’t want to make a habit of having your bills go to collections.
If you have several creditors and collection agencies trying to contact you, it’s a serious sign that you need help. But, you shouldn’t ignore the problem or avoid their calls. In fact, you might be surprised at how flexible that can be. Most are willing to work with you by setting up a payment plan, negotiating the interest rate, or settling for a lower lump sum payment. You don’t need to live in fear of answering the phone or letting your debt control your life.
10. You don’t know how much debt you carry.
Most people know when they have too much debt. However, the difference lies in how you choose to handle it. Do you have a plan to become debt free? Or, have you given up and expect to be in debt for the rest of your life?
Your situation may seem hopeless when you are drowning in debt, but you have to start somewhere. It’s hard to face the truth, but there are financial advisors and debt relief agencies that are ready to help. You don’t have to resign yourself to your situation, but you have to be willing to take the first steps to make a change.