Consumer Comeback Blog

How to Know if You’re in Too Much Debt

Written by Jeffrey Trull

light-at-endDebt gets a bad rap. It isn’t harmful in every case. Loans help us afford things that we wouldn’t be able to afford otherwise, like a house or college education. But there’s a limit to when debt stops being a useful tool for a better life and starts causing real damage.

So how do you know when you have too much debt? It’s not always an easy question, and there’s no one answer for everyone. But there are warning signs that could mean you’re in too deep.

Check the points below to see if you’re showing some of the signs of having too much debt.

Poor Debt-to-Income Ratio

This is one calculation you can make to assess your debt situation. Measuring your debt-to-income ratio isn’t just important for your own purposes – it’s also used by lenders to evaluate your financial worthiness for receiving a loan.

Use a simple guide like this one on to calculate your debt to income ratio. It’s about as simple as determining your total monthly debt payments and then dividing the result by total gross monthly income. Don’t forget to include things like your mortgage or rent payment, car loans, minimum credit card payments, student loan payments, and alimony/child support in your calculation. Then, multiply your result by 100 to turn your ratio to a percentage.

The lower your percentage, the better. If your result is less than 36%, you’re probably in okay shape. If you’re over 50%, you’re almost certainly in the danger zone and should take action to avoid falling further into debt.

Can’t Keep Up With Payments

If you’re struggling to keep up with payments, it’s probably a sign you have too much debt on your plate. It’s as simple as not having the money in the bank to make payments or paying less towards your debt than you need to or want to.

If you’re a consistent late bill-payer, you might have more debt than you can handle. Paying bills late all the time negatively affects your credit score and also allows fees to pile up, so it’s crucial that late payments don’t become routine.

If you’re just forgetful, make every effort to start paying bills on time, and consider setting up automatic payments. If you can’t make timely payments because you don’t have the money available then excessive debt may be the real problem.

Another sign you’re in a debt payment struggle: you’re only able to make the minimum payments on all your accounts. While making minimum payments is often part of a strategy to concentrate on killing off different debts, paying the minimum of everything means you’ll just be locking yourself into debt for years to come.

Another red flag is you’re keeping balances on your credit card accounts month-to-month. Credit cards are an expensive way to finance just about anything, so using them as a source of loaned money means you likely haven’t planned adequately for the debt you’ve racked up.

Unable to Save or Invest Anything

If you have nothing saved, even for emergencies, and aren’t able to make saving a priority, you might be dealing with too much debt on the books. Having even a minimal amount of savings for the most serious of situations is such a fundamental component of being in healthy financial shape, and it should never be ignored.

If you’re managing to save a little, make sure to look at your net worth to see if it’s actually increasing. Net worth is simply your total assets (cash, savings, investments, and property) less your total liabilities (any outstanding debt or payments due). If you’re saving money but simultaneously taking on even more debt, you’re likely just treading water instead of building real assets. Always think about increasing your net worth instead of adding to your tally of both assets and liabilities simultaneously.

No End to Debt in Sight

If you’re in debt, it’s motivating and encouraging to be able to see the light at the end of the tunnel when you’ll finally be able to say that you’ve paid it all off. If you’re just a few months or years from making that happen, you’re likely managing your debt well. But if balances are so high and payments are so uncertain that you have no idea or desire to figure out a payoff date, you might be in trouble.

Use a debt calculator, like this one, to figure out when you’ll be finished with credit card payments. Since credit cards likely have the most variable term lengths of all your accounts, it’s important to know how long you’ll be paying at the rate that you’re paying off your balances. For other loans, it’s simply a matter of looking at the current term and deciding if you’ll make more than the monthly payment to pay down the debt faster.

You’re Constantly Worrying About Money

Carrying debt can be stressful and take its toll on your life and even your health. If you find yourself constantly worrying about money and your debt, it probably means you have too much.

If you’re finding money to be a source of frustration, it’s helpful to consider what steps you can take to change. Putting a plan into place to reduce your debt might give you some peace of mind. Other solutions like debt consolidation might be a potential fix that makes managing the situation easier both financially and mentally.

Poor Credit Score

Take a look at your credit score and credit report. If your history is all dinged up and your score is less than excellent, it might mean that out of control debt is to blame.

Check to see if issues are related to late payments, accounts with unpaid balances, or charge-offs. If these problems are a trend throughout your credit history, it might be time to think about changing course.