How much debt is too much?

Listen to this podcast on recognizing the signs you're in over your head 

Everyone may have a different financial situation, but the signs that your debt is becoming too much are universally the same. 

Nancy Snedden, a BDO Licensed Insolvency Trustee joins the Chartered Professional Accountants Mastering Money podcast to discuss what signs point to being in over your head with debt, and what you can do about it. 

Question 1: Is your debt a problem? 

The smallest signs can sometimes be the biggest indicators that your debt has become too much to handle. 

For example, simply thinking about debt and worrying about it on a regular basis is a sign that things aren’t quite as stable as you’d like them to be. Being worried to look at your online banking or credit card statements are other signs your debt is becoming too much to handle. If you’re feeling this, you’ve already taken a great first step by questioning your debt and learning how to measure it more accurately. 

Also look at the size and frequency of your debt payments. Maybe you only make the minimum monthly payments on credit cards? Maybe you’re struggling to pay your bills on a regular basis or have been late on occasion? These may seem minor at first, but these habits are what allow your debt to grow. 

Lastly, being denied a loan or getting collection calls are crystal clear signs that your debt has grown to a point where it’s negatively affecting your everyday life. Think about debt counselling to help you rein in your debts.

Question 2: Have you evaluated your credit utilization? 

Every 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:

• adding up all your credit card balances,
• adding up your credit card limits,
• dividing the total of your balances by your total available credit across all cards,
• multiplying by 100 to get the percentage.

The percentage tells you how much of your credit you’re using — 35% or lower is considered to be safe. 

Is $5,000 a lot of debt?  

The answer will depend on your credit limits. If you have $10,000 in available credit across two cards, then your utilization is 50%, which is a bit high and can hurt your credit score. But if you have $20,000 in credit across three cards, you’re only using 25%, which is in a healthy range. 

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.

Question 3: Have you evaluated your debt-to-income (DTI) ratio? 

While credit utilization is calculated by credit bureaus, your DTI ratio is usually calculated by lenders before they give out a loan. You can very easily get this same information by dividing your total monthly debt payments by your total monthly income before taxes. Alternatively, you can use our easy DTI ratio calculator. 

As a percentage, your DTI will tell you how much of your income is going towards paying off your debts every month. A DTI higher than 40% means that almost half of your monthly income is going towards debt repayment and an indication that you might want to explore debt relief strategies so you have money to cover unexpected costs like hospital bills or hiring a plumber for a burst pipe.  

So, is $5,000 a lot of debt? In this case, it depends on how much of your income you’re putting towards that debt on a monthly basis. Another way to look at it is the 28/36 rule. This states that no more than 28% of your income before taxes should be going to home expenses (including mortgage payments) and no more than 36% should be going to all other debts. 

Once you identify how much money is going towards your debts, ask yourself if it’s enough. At the current rate, will you pay it off within a year? Two years? Five years? This is what really determines the severity of a debt. If the minimum payments are taking too much from your income, or you don’t think you can consistently pay them for the total length of your debt, you may need to ask for help.

Question 4: Is your debt affecting your health? 

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 all signs are pointing to ‘too much debt,’ you don’t have to suffer alone 

You have options, starting with debt counselling from a BDO Licensed Insolvency Trustee (LIT) who will assess your debt situation and build a plan to get you back in the black—hopefully for good. 

Take care of your financial health by contacting a BDO LIT today for a free consultation.

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