Are You Carrying Too Much Debt?

Are You Carrying Too Much Debt?

Are You Carrying Too Much Debt?
Reading Time: 5 minutes
If you’re struggling to make regular payments on a student loan, mortgage, or credit card, you may have a debt problem. If so, there are a few things you can do to minimize your expenses, lower your APRs, and extricate yourself from financial trouble.

How Much Debt Is Too Much?

By 2019, Americans had racked $14 trillion in credit-card debt and student-loan debt. That’s right: fourteen trillion dollars. But Canadians are culpable too. By late 2020, total consumer debt in Canada had climbed to $1.99 trillion. Debt has become a massive and worldwide problem. Any debt is too much debt if you can’t repay it comfortably. Whether this is so depends in large part on your debt-to-income ratio, or DTI. Your DTI is calculated by adding up your monthly debt payments and dividing the total by your gross monthly income. Certain DTI ratios make it almost impossible to get a mortgage or other loan. You should try to stay below 43 percent. Although the acceptable number ranges from 36 percent to 49 percent, lenders and creditors are unlikely to accept a DTI higher than 43 percent.  To assess your own financial situation, start by calculating your monthly payments and comparing it to your income to determine your DTI. What you learn will help you begin to more effectively manage your expenses, purchases, and debt. Here are the seven other major indications that you’re carrying too much debt. 

1. You Don’t Know Your Outstanding Balances

If you don’t know how much you owe, you can’t know how much you need to pay back. Knowing your outstanding balances will help you make your monthly payments and avoid further credit card debt. To calculate your outstanding balances, start by requesting a free copy of your credit report. You’ll be able to figure out exactly how much you owe by adding up the totals owed to each creditor. You also need to factor in any interest you owe by using the following formula: Principal Loan Amount x Interest Rate x Time.

2. You Make Late Payments, Skip Payments, or Pay Only the Minimum Due

Doing just one of the above can tank your credit score and send you spiraling deeper into debt. Being guilty of all three spells serious financial trouble. If you consistently miss payment due dates or delay payments, you will be slammed by hefty late fees and a higher annual percentage rate (APR) for the interest on the debt. If you regularly only pay the minimum credit card balance, you are greatly lengthening the period during which you are in debt and you will have to pay a lot more in interest in the long run.  If you are struggling to make loan, mortgage, or credit card payments, it’s a good idea to check each of your accounts to evaluate the damage and decide what to do next. 

3. You Consistently Use 30 percent or More of Your Total Available Credit 

Using up to 30 percent or more of your credit can put a dent in your credit score. Technically, any spending above 5 percent of your total available credit will start weakening your FICO score. But the damage gets worse as your usage approaches 30 percent.  

Also relevant, though, is your credit history. The credit scores of borrowers who use a big percentage of their available credit but who have a long and good credit history won’t suffer as much as the credit scores of  borrowers who have just gotten their first credit card and quickly gulp a lot of credit..

4. You Do Not Qualify for New Accounts

If you don’t qualify for new credit card accounts, there’s a good chance that you’re not financially healthy. When evaluating candidates, most credit companies look for a strong FICO score, a history of reliable payments, and little or no debt. If lenders consistently deny your applications for a credit card or loan , it’s a sign that your debt is becoming unmanageable. Or already is.

5. Most of Your Paycheck Goes Toward Debt

If you’re spending most of what you make on your total monthly debt, it’s not only an enormous source of financial stress, it’s also an untenable cycle that will only worsen. Whether your hard-earned dollars are going toward a mortgage, credit cards, or a student loan, you should be dedicating no more than 40 percent of your pretax monthly income to paying off debt.

6. You Lack an Emergency Fund

Having no emergency fund can put you in a very bad position if an expensive emergency arises. Too many people live paycheck to paycheck. But having nothing in your savings account is a recipe for burying yourself in debt. If you ever get laid off from work or socked with unexpected medical bills, having no emergency fund may mean putting thousands of dollars of expenses on a credit card, debt that will be very hard to clear.

7. You Are Getting Calls from Collection Agencies 

Being dunned by collection agencies is a pretty clear red flag about your financial health. It means that your original creditor has turned your debt over to a collection agency in a last-ditch effort to get you to pay what you owe. Never ignore a collection agency. If you do, the agency may file a lawsuit against you. Instead, take notes, don’t admit that you owe any debt, and request a debt-validation letter. Follow these steps so that you don’t accidentally relinquish your legal rights.

Getting Out of Debt

Now that you have a better idea of your financial situation, let’s look at a few of the steps you can take to get out of debt and regain control of your life.

Refinance Or Consolidate Your Debt

Refinancing is one way to reduce your debt. To refinance, you replace the existing terms of your credit agreement with a revised agreement that enables you to lower your interest rates, institute a better payment schedule, or make other favorable changes. You may also choose a debt consolidation loan that enables you to reduce the high interest rates of several accounts. Instead of making several payments with high interest rates, you can make a single payment that helps you save more and pay less every month.

Get An Affordable, Fixed Rate

A fixed-rate loan is usually a mortgage loan. It means that you make payments over a set period of time until you’ve repaid the principal and interest you owe on your home. Common fixed-rate terms include 30-year terms (the longest), 15-year terms (the term that lenders most often extend, typically with lower interest rates), and 10-year terms (for homeowners who can afford a relatively high monthly payment).

Eliminate High Credit Card Fees And Improve Your Credit Score

To eliminate high credit card fees and begin to improve a poor credit score, pay as much of your account balances as possible, even if only the minimum amount is due. Also consider consolidating debt to replace the payments on several credit cards or loans with a single payment and reduce the amount of interest you must pay on the debt. Another option is to transfer the balances of several credit cards to a single credit card, which may come with a zero-percent interest on your account balance—though only temporarily, perhaps several months. Also keep in mind that these cards often charge transfer fees of 3 percent to 5 percent.

Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.

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