In the first quarter of 2019, total consumer debt hit $14 Trillion in the U.S., marking the 18th consecutive quarter for an increase. The primary areas of debt that continue to experience consistent growth are home, auto, student loans, and credit cards. These figures beg the question, “How much debt is too much?” There are several common types of debt that most Americans have, whether it be buying a home, a car, or education depending on the stage of life they’re in. Of course, most people can’t pay cash for all of these things, so they end up taking on debt, and often it's multiple debts, that can add up significantly. The question is, what is the line between a normal amount of debt and debt that can be precariously close to dangerous?

Let’s look at some of the major factors that can help determine if you’re currently juggling too much debt.

1. You're paying off credit cards with other credit cards. If you catch yourself trying to pay off a credit card with another card, you may have too much debt on your hands. Typically, making credit card payments in this manner involves very expensive fees that make it a poor option for paying off debt. You should always have enough cash available to be able to make at least a minimum monthly payment.

2. Your debt-to-income ratio is higher than 40 percent. Depending on factors like income and lifestyle, there really isn’t a right or wrong amount of debt. What is important however is your total amount of debt relative to your income; also known as your debt-to-income ratio (DTI). A DTI greater than 40% could be considered too high. There is a reason that lenders for car loans or mortgages usually require a DTI level between 30 and 40 percent; it’s because they want to ensure that you’re going to be able to meet your repayment obligations. A DTI over 40% can mean that you’re stretched too thin with not enough income to make ends meet at the end of the month.

3. You have a lot of unnecessary debts. Healthcare, mortgages, and student loans are often necessary and sometimes just hard to avoid. But unnecessary loans like car payments, travel loans, electronic device loans should be reduced or avoided altogether. If you need to finance a car, your payment should be no more than 10% of your monthly income. Better yet, save enough money to buy a reliable used car, between 2-5 years old in cash. Credit cards should really only be used for emergencies (better yet, set aside an emergency fund of at least $1,000). Generally speaking, most people do not need a credit card.

4. You are unable to make at least the minimum payments. Another sign that you’re in too much debt is If you’re unable to make the minimum monthly payments on your debts/loans. This is a very slippery slope, because when you cannot make the minimum payments or miss payments completely, then your creditor will typically add additional fees and interest to your account, making it even harder to pay off your existing debts. Continued missed payments can result in judgments, liens,  or a summons. You even might find yourself having to take a second job or even selling your existing belongings, like clothes, furniture, or if the case is serious, a car.

5. The total amount of all your credit card payments is higher than other bills. Compare how much you spend on all of your loans/debt obligations versus your regular monthly bills such as rent, food, health insurance, and other routine expenses. Add all of your individual card payments together. If that number is near what you spend on your other monthly bills, you probably have too much debt.

6. Too much debt negatively affects your credit score. Another way to tell if you have too much debt is when it starts to negatively impact your credit score. Your credit score is based on multiple factors but there are three primary ones that make up the majority of how your score is determined. The first is your payment history, which comprises 35 percent of the total credit score and is the most important factor in calculating credit scores. The next is credit utilization, which is essentially your debt-to-income ratio. For the purposes of a healthy credit score, you ideally want to keep credit utilization under 30%. Lastly is the length of your credit history, which helps establish you as a reliable borrower if you’ve managed your credit responsibly over time. If you don’t make on-time payments, have a DTI that is too high or simply don’t have a significant credit history, your credit score will suffer.

Having too much debt is a burden and can lead to severe financial obstacles in life. Use these factors to take stock of your circumstances to determine if you are carrying too much debt and if so, make eliminating debt a priority. 

Where to get professional help

Are you experiencing some type of hardship in your life like a death in the family, health issues, divorce or a job loss that is impacting your ability to keep up with debt obligations? If so, you may qualify for a debt settlement program with Financial Rescue. Our IAPDA-Certified Consultants can reduce the total amount of debt that you owe by 40%- 60% on average, and dramatically reduce the length of time it takes for you to pay those debts off. Call us at  877-973-3287 for a free, no-obligation consultation or submit a form on our website to learn more.