Almost everyone will encounter debt at some point in their lives – whether it is in the form of a credit card, student loans, auto loan, or something as simple as borrowing money from a parent. Debt isn’t necessarily a bad thing if it’s handled appropriately. So how do you know how much debt is too much? Learn how to tell when you’re in danger of excessive debt and pick up on some of the most common warning signs.
11 Signs that You Have Debt Problems
1. Struggling to Make Minimum Payments
One surefire way to tell that you may have too much debt is if you start having a difficult time keeping up with even just the minimum payments on lines of credit or other loans. The maximum amount of debt that you can assume needs to be dictated by your level of income and your ability to repay debts effectively.
2. Unable to Build Savings or Invest (Pay Yourself First)
You should always aim to have something left over at the end of each pay period to save and invest. Even if it is in smaller amounts early on in your career, you should ensure that you can continuously build wealth as you maintain your recurring expenses.
3. Credit Cards Getting Declined
A common rule of thumb is to maintain a credit utilization ratio below 30%. We recommend trying to keep it a bit lower, within 20%. If you’re having credit cards get declined due to hitting your credit limit, you have excessive debt.
4. Asking Friends and Family to Borrow Money
This isn’t to say you can’t borrow 5 bucks from a sibling or allow a close friend to buy you lunch (although you may want to return the favor). If you find yourself more frequently asking to borrow money to pay bills or keep up with your expenses, you should revisit your budget and see where you can make cuts. Money disputes can do terrible things to personal relationships and it’s just not worth it.
5. Hiding or Lying about Your Spending Habits
Another sign of excessive debt is feeling embarrassed or like you need to hide or lie about your spending habits and financial well being. Noticing these feelings is a great opportunity to review your spending habits and debts to see where you can make adjustments.
6. Overdraft Fees or Bounced Checks
If you start to encounter overdrafts or checks bouncing, that means you’re trying to spend more money than you currently have. Not only that, but overdraft fees from some banks can be extremely expensive and put you further into a negative financial situation.
7. Being Financially Unaware
Arguably the best way to stay out of excessive debt and manage your debts effectively is simply to be aware of them. Make sure you can afford any new debts before taking them on, periodically review your finances to find areas for improvement, and always be learning.
8. Credit Health is Declining
Too much debt will take a toll on your credit, directly impacting the most significant credit factors. Your credit utilization will increase beyond what is considered “positive” by credit bureaus. If you start struggling to make your payments, this will also add derogatory marks to your credit and damage your payment history.
9. Being Called by Debt Collectors
If you start to avoid paying off your debts or take longer than the agreed upon terms of the debt, it will eventually be sold off to debt collection agencies. Some of which can be pretty ruthless when it comes to contacting you for repayment. It’s best to just avoid this situation altogether.
10. Using Balance Transfers or Deferred Payments
Debt relief programs and methods come in many different forms like debt management plans (DMPs), debt settlement programs, or working with creditors to transfer balances, consolidate debt, or defer your payments. While in some cases these methods may be an effective way to alleviate some of the pressure of debts, they do not entirely resolve your debt issues.
11. Repaying Debt with Debt
Similar to debt relief methods, some people take on new debt to repay other debts through things such as a cash advance, cash-out refinance, or personal loan. This can be a great way to reduce your interest rates and make your debt less complicated. But if you find this becoming a common strategy, rather than an emergency solution, you might be headed for trouble. The only way to use one of these methods in an effective way is to thoroughly plan and organize your “get out of debt” roadmap and avoid falling back into a similar situation.
How do I Know How Much Debt I’m In?
Even if you’re not seeing any of these debt warning signs, it’s still imperative to stay aware of your debts, spending habits, and general financial health. Here are three things to help you avoid these debt danger signs.
- Monitor your debt-to-income ratio (DTI)
- Make a budget and stick to it
- Track your spending and always look for ways to spend smarter
Responding to Danger Signs of Excessive Debt
It’s essential to be proactive and not reactive when it comes to avoiding taking on too much debt, but know how to react if you find yourself in that situation.
As we mentioned before, awareness is key. Staying on top of your finances and knowing how your money comes and goes is the first step to avoiding excessive debt. The other piece of that is to learn the best practices and have the discipline to make financially responsible decisions.
If you have started to see some of these debt warning signs, or would simply like to avoid them entirely be sure to monitor your spending and DTI and stick to your budget.
Another great tip is to work on setting financial goals. Whether you’re saving for a large life-event purchase like a home or something smaller that’s just for fun, having financial goals will motivate you to save more and spend less. Keeping these goals in mind when making financial decisions can help steer you in the right direction.