Most Americans have debt; however, some people develop the habit of taking on more financial liability than they can handle. So, how will you know when have too much debt?
To know how your debt compares to your income, you need to get your debt-to-income ratio. Your total liability is too much when it’s more than forty percent of your annual income, excluding student loans and mortgage.
There are also physical signs of having too many financial obligations that include insomnia and stress. If you are suffering from these symptoms, chances are that you already owe too much money.
Computing Debt-To-Income Ratio
Getting this ratio requires simple math. It is just the sum of recurring liabilities divided by your gross income each month. The hard part is listing all your financial obligations, especially if you are not monitoring them in the first place.
The recurring liabilities are items you pay each month that include rent or mortgage, student loans, credit cards, and auto loans, just to name a few. Your gross income is the amount you earn before insurance, taxes, and social security are taken out.
A debt-to-income ratio that’s below 15% is bearable, but you should consider repaying financial obligations as soon as possible. If it is between 15% and 39%, consult a credit counselor right away. A ratio that’s more than 40% is already considered high risk and bankruptcy is imminent.
Some lenders use debt-to-income ratio to determine if they will approve the application of a potential borrower. Some lending companies accept a ratio of 36%. However, having a debt-to-income of more than 43% might disqualify a consumer from getting a mortgage.
Indicators of Debt Problems
Taking on debt is easy, even with a bad credit score, but it takes strength and courage to acknowledge you are in deep trouble. Here are some indicators that you have more financial liabilities than you can handle.
Adds to Balances Every Month
One thing that will make you realize you have a problem is when the total amount of liabilities increases each month. Debt can easily pile up if you don’t monitor your spending or credit card balances. The best way to solve this problem is to track finances diligently. That way you will be more careful about your spending and start paying off all your obligations.
Don’t Know the Total Amount of Debt
You try to ignore the total amount of money you owe because you can’t bear to face the truth. You know you borrowed too much and are afraid to own up to it. Your liabilities will not disappear when ignored, but instead, they will increase over time.
Instead of running away from creditors, ask them for a list. This will allow you to determine how much you really owe and create a repayment plan. Make use of online service like nation 21 loans so find low interest lenders to better plan your repayment.
Surviving Paycheck to Paycheck
You know you are struggling financially when you are living from one paycheck to another and not prepared when an emergency occurs. Your household lives on your entire paycheck, down to the last dollar, then starts counting down the days to the next paycheck in order to make lowest payments on your credit cards. Then you use the available credit to buy food and pay bills.
Late Payment on Bills
Another sign that you have too many financial obligations is when you’re late in paying your monthly bills because you don’t have money. Late payments will make the situation worse because you need to deal with late charges and higher interest rates.
Borrowing more money to pay bills is not the right solution to late payments. You will end up running out of places to borrow money. The situation might also estrange you from friends and family if you choose to borrow from them to cover your bills.
If you are always late on your payments, your credit will suffer. Look at your expenses each month and find ways to lower them and afford to pay the bills on time. Reducing overhead expenses is the best way to handle the situation.
Debt Payments Higher than Mortgage or Rent
You know you have financial problems when your monthly payments are more than the cost of your mortgage or rent. Paying double the cost of accommodation each month can drain the funds of a household fast. You need to make some changes and earn more to turn things around.
Chased by Bill Collectors
When you get more calls from collectors than your friends, then you have too much debt. Collectors call people when their accounts become delinquent. If they can’t contact you, they might sue for the amount you owe. If the collection agency wins the lawsuit, the court will allow collectors to garnish your paychecks.
Net Worth is Below Zero
If you check your net worth is below zero, then you have a big problem. Net worth is subtracting liabilities from assets. A negative net worth is less than nothing. If you haven’t checked your net worth, do it today. There are some sites that help you do it for free.
Credit Card Declined
Numerous debts can build a mountain of financial obligations. If your credit card starts to cross it’s limit every month and you start feeling difficulties to pay your necessary bills on time. Sometimes it might be a little embarrassing, but that’s only a sign that you have gone too far with your debts.
The Road to Debt Recovery
Recovering from financial problems is hard. It takes a lot of time and effort. Realizing that you have too much debt is an important step to take. If you feel overwhelmed by financial obligations, consult a credit counselor today!