Too Much Debt, What Can You Do?

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Do you have too much debt and aren’t sure what to do?

While having some debt can be useful, having too much debt can put your finances in a bind. According to Debt.org, the average American household has an average debt of $134,643 in 2016, so it’s no wonder that we may often wonder if we have more than we should. The debt issue in America can likely be attributed, in part, to a lack of financial education.

In this article, I’m going to discuss how to determine how much debt you have, if you have too much debt, and some options you have to help your financial situation.

Let’s get right into it.

Determine How Much Debt You Have

One way to determine if you have too much debt is to examine what’s called your debt-to-income ratio, also known as your DTI. Your DTI is determined by dividing your total monthly recurring debt into your gross monthly income.

To calculate your DTI, add up all of your debts’ monthly payments. This includes your credit cards, personal loans, auto loans, student loans, and your mortgage and/or rent. From there, take your gross monthly income and divide. 

Let’s use simple numbers as an example:

  • Gross income: $5,000
  • Mortgage payment: $1,000
  • Credit card payment: $100
  • Auto Loan: $400
  • Student Loan: $100

Adding up the debts, your total debt payments are $1,600 per month. $1,600 divided by $5,000 is 0.32, making your DTI ratio 32%.

When you are looking to borrow money, lenders like to see a DTI ratio less than 36%. It’s possible to get a loan with a slightly higher ratio, however, you will likely have higher interest rates due to being at greater risk.

Two ways of reducing your DTI ratio is to cut your expenses and raise your income. When you reduce expenses, you’ll be able to apply more money to your debt, which will help you lower your overall debt owed. When you add more income, your DTI ratio will decrease as your income goes up. You’ll also have extra money to pay off debts, which also decreases your DTI ratio.

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How To Tell If You Have Too Much Debt

While it’s normal for the typical American to have some amount of debt, there are signs that you may have too much. Here are some warning signs that may indicate that your debt levels are too high.

  • You only make the minimum payments on all of your debts, especially your credit cards.
  • You use payday loans, cash advances, and other high-fee, high-interest credit.
  • You have creditors or collection agencies calling you about your debts.
  • You don’t have an emergency fund or your bank balance regularly sits at $0.
  • You’re using new credit cards to pay off old credit cards.
  • Your credit cards are maxed out.
  • You make regular payments but your debt balances aren’t going down because you’re barely covering interest payments.
  • Your DTI ratio is above 50%

If you find yourself in one or more of these situations, it may be time to tackle your debt more seriously. There are steps you can take to get off of debt effectively.

First Steps to Dealing with Your Debt

If you’re in a lot of debt, the first steps you can take are to find extra money to tackle balances faster. The first step you can take is to lower your monthly living expenses, which will allow you to pay down debt easier. The next step is to raise your income, which can be trickier for some. If you focus on paying down your lowest balances first via the debt snowball method, you’ll begin to free up more money quicker.

How does this work? Here’s a simple example. Assume you have a personal loan with a $150 monthly payment and a remaining balance of $1,000. You decide to apply an extra $100 per month towards the personal loan, bringing your monthly payment up to $250. Assume for the sake of simplicity that you pay off your loan in 4 months (we’re omitting interest accruing in this example). Now that your personal loan is paid off, you have an additional $150 per month that can be applied towards another debt. 

As you pay off more debt accounts, you’ll have more and more money at the end of each month, which will allow you to apply more money to your next account, or have more breathing room in your finances in general.

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Other Options to Consider If You Have Too Much Debt

Let’s examine other scenarios that might come up.

Too Much Auto Loan Debt

If you have an auto loan on a car that you’re paying more than 10% of your gross monthly income for, you may have purchased too much car. At this point, you may consider selling your car and buying a more affordable one, keeping any extra money you can.

For example, let’s assume you have a $22,000 auto loan on a car you purchased for $30,000. Perhaps the car is now worth $24,000. You sell the car for $24,000 and pay off the $22,000 auto loan, keeping $2,000. Now, you purchase a $10,000 used car that’s in great condition and you finance $8,000 of it. You’ve now effectively lowered your auto debt by $16,000 by swapping out your car.

Too Much Mortgage Debt

Let’s assume your car isn’t the issue but your mortgage payments are too high. One option is to refinance your mortgage to a lower interest rate if possible. You can also extend the period of your mortgage via refinancing. That is, if you have a 15-year mortgage and you move to a 30-year mortgage, your monthly payments will drop considerably.

Lastly, if all else fails, moving to a less expensive area or downsizing your home may be an option to consider. 

Too Much Credit Card Debt

Perhaps you have too much credit card debt. You’ve bought a lot of things that you either didn’t need or can’t afford. It happens and you can certainly do something about your situation. 

If you’re only able to make the minimum payments on your credit cards, then it’s possible you have too much credit card debt. It’s also possible that you have too much credit card debt if you can’t pay off your balance in under 12 months.

Credit cards are generally some of the highest interest debt you’ll have, so it’s important to pay them off as best you can. One way to reduce how much interest you pay is to ask your credit card company for a lower rate.

If you feel you can pay your credit cards off in 12 months, it may make sense to consolidate your cards with a balance transfer to a 0% Introductory APR card, where you’ll generally have 1 year to pay off your balance without incurring any interest charges. This can help you save a lot of money as long as you can pay the balance off before the introductory period ends.

Seeking Help If You Have Too Much Debt

It’s possible that your debt situation has gotten difficult to deal with. You may have too much credit card debt, or your net worth may be negative and decreasing. You may be having marital issues or you might be losing sleep over your personal financial situation.

If you’re unable to navigate your debt situation yourself, then one option you have is to get credit counseling through a certified nonprofit credit counseling agency

Credit counselors can help you with a debt management plan, which is a plan to help you pay off all of your debt in up to 5 years. If you had $12,000 in debt, you would divide $12,000 by 60 months and get $200 as your monthly payment.

When reaching out to a credit counseling agency, be sure to ask questions and ensure that you feel comfortable with the answers you receive. 

What To Know About Unpaid Debt

Unpaid debt doesn’t simply go away. Much of the time, your creditors will send your debt to a collection agency and these agencies will contact you through mail and on the phone to collect payment. 

Your credit score will decrease when you have an account sent to collections and it may be difficult to apply for more credit with a lower score and an open collection on your account. 

It’s also possible that a collection agency will sue you in an attempt to get you to pay. 

After a time, typically 7 years, your debt will fall off your credit report. It’s also possible that you will reach a statue of limitation and the collection agency will no longer be able to take you to court for your debt. This, however, does not mean you no longer owe the money. The only true way to clean up unpaid debt is to settle your account and pay what is agreed upon.

This guide will teach you how to increase your credit score if you've had credit issues in the past.

How To Avoid Too Much Debt In The Future

Avoiding excessive debt in the future comes down to discipline and becoming more educated in personal finance. One way to start is to create a budget and identify where you can cut back. If you shop on impulse, check out our guide on how to curb impulse spending. Earning more money will help you pay down debt and keep your debt-to-income ratio. A side hustle can be a great way to earn more money without committing too much of your time.

Discipline comes down to:

  • Using good debt wisely
  • Thinking it over before purchasing something on credit
  • Paying down debt balances as much as you can
  • Avoiding bad debt wherever possible
  • Controlling your spending habits
  • Understanding how much you can afford when you make a large purchase such as a house or car

Committing to staying disciplined has long-term benefits across all aspects of your life.

Wrapping It Up

In this article, we went over ways to determine if you have too much debt, options you have to work on your debt situation, and how to avoid bad debt in the future. It’s normal to have some debt at any given time, however, having excessive debt leads to financial difficulties.

What are you doing to work on your debt situation?

Crush Debt for Good

Get out of debt and stop impulse spending, so that you won't get into credit card debt again.

debt payoff tips eBook

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