8 Startling Signs You Have Too Much Debt (And More Credit Isn’t Always the Solution)

Signs you have too much debt

By Lauren Bringle, AFC®

Do you worry about money all day every day? Is debt impacting not only your financial health and your mental health? If this sounds familiar, you’re not alone. In a recent Self poll, nearly 20% of people between the ages of 18-34 said they worry all day every day about money, and with good reason.

In a study by Northwestern Mutual, the average American has about $38,000 in personal debt, not including debt from their mortgages. Of this debt, 25% is from credit card debt. I guess you could say this country has a bit of a debt problem.

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In many cases, these debts prevent you from focusing on building wealth for the future, since debt essentially means paying off the past.

“Debt is your financial past. Your past is paying for student loans, vehicle purchases, medical bills and credit cards. These debts prevent you from securing a financial future. People often struggle most of their lives paying debts of the past. The more quickly you eliminate your old past debts, the sooner you can plan and take care of your future,” Jennifer H. Plantier of Hardin-Simmons University writes in the book "Personal Finance" by Thomas Garman and Raymond Forgue.

While some people are almost too aware (painfully aware) of how much debt they have, many people could be struggling with debt without even realizing it.

How do you know if you have too much debt? Here are some ways to tell if you have too much debt, why getting more credit might not be the right solution, and some ideas that could help you break the debt cycle.

Signs you have too much debt

1 - You have no idea how much money you owe

If you have no idea how much money you owe on your debts (or are too scared to find out), you could have too much debt. Sort of like ripping off a Band Aid®, taking a clear look at how much you owe can sting at first. But the first step towards budgeting and getting your finances back on track is to know how much money you’re spending.

“The most important aspect of keeping your money is being aware of how much of it you’re spending,” Tiffany Aliche, the Budgetnista, says.

The next step? To know how much money you are making so you can see how your current spending fits in, or what adjustments you need to make to it.

It takes courage to confront your own financial habits, so be brave! Sit down and add up the totals you owe on debts, including:

  • Mortgage payments
  • Payments on personal loans, such as car loans
  • Credit card debt
  • Student loan debt
  • Any other items you financed – like an appliance or jewelry purchase, just to name a few
Knowing what you owe can help you get a better handle on your debt and understand how to more effectively manage your cash flow.

2 - You keep getting new credit cards to pay off old credit cards

Sometimes, transferring credit card debt to a 0% introductory offer card makes sense. If all you need is a temporary break in interest to make your monthly payments on time or pay down more debt, then adding another credit card could be the right choice. Just be aware of any balance transfer fees prior to going this route.

However, if all you’re doing is trying to get access to more and more spending, without paying anything down, then you could just be adding more debt to an already dire financial situation. Not to mention, you could damage your credit in the process by keeping your total credit utilization high. This high credit usage could cost you more when it comes to gaining access to other credit products.

3 - You ask for credit limit increases to put more on your card, not to improve your credit

Sometimes, asking your credit card companies for a credit limit increase can be a positive thing when it comes to improving your credit score. After all, keeping your credit limits high, and your credit usage low, are positive indicators that you manage credit responsibly.

But, if you raise your credit limit to spend more money you know or don’t realize you can’t pay, then you probably have too much debt.

4 - You treat credit cards like additional income and live outside your means

Dave Ramsey famously promotes the idea of “acting your wage,” which really just means living within your means and not trying to “keep up with the Joneses” if you can’t afford to. While Dave Ramsey’s attitudes towards credit and debt don’t necessarily work for everyone, this is a good rule to follow when it comes to using your credit card.

Using a credit card to increase your income so you can buy non-emergency items is a big no-no. Whenever possible, treat your credit card like a debit card by only putting purchases on it you know you can pay off, in full, at the end of the month, based on your current income.

5 - You make late payments, skip payments, or only pay the minimum due

Skipping payments or paying late can get expensive in a hurry, thanks to late fees. And the term “minimum amount due” can be a little misleading. While yes, technically it’s the minimum amount you have to pay so a payment doesn’t report to the credit bureaus as late or missed, if you want to avoid interest charges, making minimum payments on your credit card debt isn’t the best choice.

By only paying the minimum amount, you can end up paying mostly interest on the debt (not paying the debt down) while more interest continues to add up. If you have extra money one month, or receive a bonus or raise, consider putting that money towards your credit card payments.

To illustrate this, here’s how much interest you would accrue on a $6,081 debt with a 14.99% interest rate if you pay the minimum payment, double the minimum payment, or the minimum payment plus $100 each month.

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You can see here that, if you only pay the minimum amount due, over time you’ve just added over $4,000 worth of interest to a roughly $6,000 debt. And that’s at a relatively low 14.99% interest rate.

If you have a higher interest rate on your credit card, the amount you pay in interest could easily surpass the original cost of the purchase. To avoid turning credit card debt into even more debt, try to pay your credit card bills on time and in full whenever possible. Or at least pay more than the minimum amount due.

6 - You consistently use 30% or more of your total available credit

Hey, I get it. Emergencies happen, right? You can’t always control how much you have to put on your credit card. However, if you consistently charge non-emergency purchases that you can’t afford to your credit card and that’s what keeps your credit usage high, you might want to reconsider your spending habits.

Since how much of the available credit you use adds up to 30% of your FICO credit score, it is generally recommended that you keep the amount of credit you use to under 30% of your total available credit limit). The amount of credit you use compared to the total credit available to you is also known as a credit utilization ratio.

Here’s a simple example of what that could look like.

utilization ration example

Keep in mind, this rule applies both to your use of credit on a single credit card, and across your credit cards as a whole.

Bonus tip: To help plan for emergencies without relying too heavily on your credit card, try to set up an emergency fund, which is a savings account used only for emergencies. Ideally, this fund would cover 3-6 months of living expenses, but every little bit set aside can help.

7 - Your debt-to-income ratio is too high

What exactly is your Debt-to-Income (DTI) ratio? As the name suggests, it looks at how much debt you have compared to how much money you make. The higher the ratio, the higher the risk (generally speaking) to the lender that you won’t pay back what you owe. You find this ratio by adding up all of your monthly debt payments and dividing it by your gross income (your income pre-tax).

This ratio helps lenders measure your ability to repay what you borrow and manage your monthly payments. According to the Consumer Financial Protection Bureau (CFPB), a 43% DTI ratio is usually the highest ratio a borrower can have and still get a qualified mortgage.

So if you’re planning to buy a house in the next few years, try to reduce your debt below that line first.

In addition to impacting lending decisions, your DTI ratio can also be a helpful tool for you to better understand your current financial situation. Here’s how to calculate it for yourself if you’re curious, using an example from the CFPB…

Calculating your Debt-to-Income ratio

Monthly debts:

  • $1,500 monthly mortgage payment
  • $100 monthly car payment
  • $400 additional monthly debt payments
Now, just add these up (1,500+100+400) to get your total monthly debt payments, which in this case add up to $2,000. The next step is to divide your total monthly debt payments ($2,000) by your total monthly income (before taxes and other deductions), then multiply it by 100 to get a percentage.

For this example, let’s say that your pre-tax monthly income is $6,000.

Total monthly debt payments ($2,000) ÷ Pre-tax monthly income ($6,000) x 100 = 33%.

Sound too complicated? Here’s a friendly little calculator that could make figuring out your DTI ratio easier.

8 - You experience repossession, foreclosure or wage garnishment

If you have secured debt that uses a piece of property (like a home or car) to secure your loan, you could face losing that property if you are not able to pay off debt as agreed.

If your car is repossessed or your home foreclosed due to missing payments or otherwise failing to pay your auto loan or mortgage as agreed, you definitely have too much debt. Wage garnishment, which is a court order that money (usually wages paid by an employer) be seized to satisfy a debt, is another red flag for debt.

Again, while sometimes these consequences reflect a problem of living outside your means, sometimes these are the results of an emergency that causes you to default on loan or other payments. If you can, try to talk to your lender before missing payments or facing these losses, or consider bankruptcy after talking with a financial counselor or legal professional who could help you decide if this is the right option for you.

If you find yourself stuck and need help with debt management or debt repayment, consider a debt management plan from a nonprofit organization, or seeking help from a certified credit counselor.

Bottom line – when more credit might not be the answer

Having too much debt can feel crippling at times (believe me, I’ve been there). Aside from the impacts to your financial, mental and physical health, too much debt can also damage your credit score, which is quite a hot topic in today’s personal finance space.

However, it’s important to remember that your credit score isn’t the end-all-be-all. Sure, it’s important. Sure, having better credit could save you thousands of dollars over the course of a lifetime. But if you’re drowning in debt, focus on paying that down first, and your credit will usually improve as a result.

While it can be tempting to turn to scams that promise to eliminate your debt or improve your credit quickly, remember that, when it comes to the race between the tortoise and the hare, sometimes the steady pace is the best. This is especially true when it comes to credit.

So if you find yourself drowning in debt, try to focus on first getting yourself to a better place financially, then paying down as much debt as you can. Focus on your long-term financial health. You can worry about building your credit again later.

About the author

Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings.

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Written on August 6, 2019
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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