How to Determine if You Have a Debt Problem

Key Takeaways
  • High-interest debt is easy to get but hard to pay off.
  • Too much debt can lead to damaged credit and higher borrowing costs.
  • The low monthly payments requiredby creditors give a false sense of affordability.

Are you in the habit of paying for everyday purchases with credit?It’s easy to charge what you want and need, paying it back a little at a time. But if monthly payments do not exceed the amount charged every month, balances and interest charges grow.

Over time, debt levels creep up until one day,when the merchant declines the charge because you maxed out your credit. When you borrow too much, stress and financial pressure increase, and you may begin to wonder if you have more debt obligations than you can handle.

It’s easy to ignore the warning signs of excessive debt. However, doing so comes with a high financial cost. Swift action could allow you to make small incremental changes. Where delays often require more drastic measures. When you reach the point where you are questioning your debt loads, a few signs can help you determine the seriousness of your financial hardship.

Are You Regularly Paying the Minimum on Revolving Accounts?

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Credit card companies only require a minimum payment of one to three percent of the outstanding balance. When the company charges 12 to 30% interest, compounded daily, the minimum amount due will only lower your balance by a few dollars.

You can easily afford the $30 to $100 per month when you first carry a balance. But as the balance grows on multiple cards, those deceivingly low payments can soon add up to a thousand dollars or more. Now you have an unmanageable payment that does not significantly reduce balances.

You have a debt problem if you cannot pay more than the minimum amount on multiple credit card accounts. Making minimum payments could take 30 years or more to pay off the bill, even if you never used the card again.

Have You Received Credit Denials?

The first warning sign of a debt problem may come from a rejected application. Banks rely heavily on your debt-to-income ratio when approving applications. This ratio analyzes the amount of debt you have as a percentage of your income.

Both application denials for new credit or actively seeking credit offers to manage existing debts levels are warning signs of financial distress.


Are Debt Payments a Significant Percentage of Your Income?

One accurate way to calculate your debt burden is to consider it as a portion of your overall income. Lenders use your debt-to-income ratio or DTI when making lending decisions. You can use the same calculation to gauge the affordability of existing debt or as a decision-making tool when considering new loans.

An acceptable DTI ranges from 36 to 43%, including your house payment. Monthly payment amounts that exceed this range are an indication that you have too much debt.

To calculate your DTI, add all your debt payments using the minimum amount due. Then divide the total by your gross monthly income. For example, if you owe $1,000 on the mortgage, $400 for the car, $800 on credit cards, and $300 for student loans, your total debt payments are $2,500 per month. If you earn$5,000 a month before taxes, you have a DTI of 50%.

Is Your Credit Damaged?

The two largest factors impacting your credit score are payment history and revolving balances. Late payments damage your score more than any other action and account for 35 percent of your FICO credit score.

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Second in importance is low account balances on credit cards and revolving debt, making up 30% of your FICO score. Maxed-out credit cards hurt your score almost as much as a late payment and signifies that you have more obligations than your income can support.

Final Thoughts

Instead of jugging debt or transferring balances from one account to another, some alternatives can help you pay down debt faster. When you experience a financial hardship, it may be possible to renegotiate your debt contracts to get better terms.