Debt is a part of many people's financial lives, whether it’s student loans, a mortgage, or credit cards. But at what point does it stop being manageable and start becoming a problem? Is $5,000 a lot of debt? What about $10,000?
The truth is the amount of debt you carry isn’t the only factor to consider. It’s also about how that debt fits into your financial situation. How much income do you have? How much of that income is going toward paying off debt? There are ways to tell if your debt has become too much to handle, though.
Debt can quickly become overwhelming if not managed properly, and sometimes the signs are subtle. It’s important to recognize these red flags early and take control before things escalate. Here’s a checklist of red flags that indicate your debt might be becoming a bigger problem than you realize:
If you’re consistently only able to make the minimum payments on your credit cards or loans, this is a major red flag. Only paying the minimum means you'll likely be paying off the debt for years.
If you find yourself borrowing money from friends, family, or taking out additional loans to cover basic living expenses, it’s a sign that your debt has surpassed your ability to manage it. This cycle can be difficult to break without addressing the root cause.
Missed or late payments indicate that you’re struggling to stay on top of your bills. Not only do late payments negatively impact your credit score, but they also result in added interest charges and late fees, which only worsen your debt situation.
If thinking about your debt causes you anxiety or stress, it's time to look for a solution.
If you find that your debt is keeping you up at night worrying then it’s likely you are close to reaching a breaking point.
If you recognize any of these warning signs in your own situation, you may have too much debt.
One of the best ways to tell if you have too much debt is to look at the kinds of debts you have.
Not all debts are bad, and in fact, some types of debt can actually be beneficial if managed properly. Good debt generally is an investment in your future. Bad debt is something that helps you more in the short term. Knowing what kind of debt you have can help you see if your debt level is concerning.
'Good debts' are often some of the most expensive things you'll ever pay for. Some examples of good debts are:
On the other hand, bad debt is money borrowed for things that don’t appreciate in value and often carry high-interest rates. Bad debt doesn’t contribute to your long-term wealth and can create financial stress if not managed properly.
Some common examples of bad debt are:
If you have debt that will improve your future, such as a mortgage or student loans, and you can make the payments, then you likely have nothing to worry about. While these debts can be daunting, there’s nothing to worry about as long as you’re making your payments. It’s only if you can’t afford the payments that you need to revaluate your options.
If, on the other hand, you have large amounts of credit card debt, then that’s a worrying sign even if you can afford the bills.
Your debt-to-income (DTI) ratio is an important financial metric that shows how much of your monthly income goes toward paying off your debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income (income before taxes). Understanding your DTI ratio can help you determine if you’re overextended financially and whether debt is becoming too much to manage.
To calculate your DTI ratio, follow these simple steps:
A lower DTI ratio generally indicates that you’re better able to manage your debt and have room to take on additional financial responsibilities if necessary. A higher DTI ratio likely means that you have too much debt.
It’s important to keep your DTI in mind when it comes to your debt. $5,000 of debt might be a lot for you, but not a lot for someone earning twice as much. Whether you have too much debt is often relative to how much you earn.
How do you know if you have too much debt? BDO’s Debt-to-income calculator can show you what your ratio is.
Calculate your debt-to-income ratioEvery month, credit bureaus calculate how much of your available credit you use as a key factor in determining your credit score. But can it also help you decide whether you’re taking on too much credit card debt?
You can calculate your credit utilization for just your credit cards by:
The percentage tells you how much of your credit you’re using — 35% or lower is considered to be safe.
A high utilization rate isn’t necessarily a problem if you pay off your cards every month, but if your debt is carrying over, it may start accumulating. By measuring monthly, you can see if your credit utilization is staying the same or growing. If you’re using more and more of your available credit, it’s a sign of debt trouble, and eventually you’ll hit your limit.
Combined with an accurate measurement of how much of your income is going towards debt, credit utilization can be a helpful tool.
Debt can have serious emotional effects that can be damaging to your mental and physical health. Regular anxiety can lead to exhaustion, higher blood pressure, stomach problems, and more. If you’re losing sleep over your debt or it makes you feel depressed then you already know that it’s become a problem and it’s only going to get worse until you manage it.
If the signs indicate that your debt is becoming overwhelming, remember—you don’t have to face it alone. There are solutions available to help you regain control of your finances. One of the best options is debt counselling with a BDO Licensed Insolvency Trustee (LIT). An LIT will thoroughly assess your financial situation and work with you to create a personalized plan to help you get back on track and achieve lasting financial stability.
Take the first step toward financial freedom by reaching out to a BDO LIT today for a free consultation.