But what does it mean to have a huge problem when it comes to debt? There are two ways to define this.
The first is your debt-to-income ratio. Experts believe that your total debt should be 43% of your income. Apparently, this is the highest ratio that will allow you to qualify for a mortgage. Any higher and you will fail to get approval for a home loan.
Another way to determine if you have too much debt is your credit utilization. This is the one that affects your credit score. If your balance is more than 30% of your credit limit, that can ruin your credit score. In effect, it will compromise your ability to get financial products with the best interest rate and terms.
As you can see, when you have a huge debt problem, it will negatively affect the financial opportunities that you can enjoy. It will also result in other money problems in the future. So if you want to protect your financial future, you have to do something about your debt situation right now.
Signs you have too much debt
First, you need to know if you have too much debt. There are certain signs that will tell you that debt is about to ruin your personal finances.
You work to pay off your debts
Does it seem like you are working just so you can pay off your debts? Are you looking forward to payday because you need the money to meet your credit obligations? If it seems like most of your income goes to your debt payments, that is an obvious sign that you have accumulated a lot of debt.
You can only afford to pay the minimum amount
If you can only afford to pay the minimum amount of your debts, that is also a sign that your balance may have already reached a really high level. There are two things that can affect your minimum payment – the high-interest rate and the balance. Mostly, it is the balance that has a huge effect. The higher the balance, the higher the minimum payment requirement.
You cannot meet your saving goals
Another sign that you have a big problem with debt is when you are not meeting your saving goals. If your income is mostly going to your debt payments and your basic expenses, that means you hardly have enough left for your saving goals. According to recent reports, Millennials have been making an effort to save more. In fact, 16% are reported to have more than $100,000 saved. While this seems like a piece of good news, you have to remember that 16% is still a small percentage. And given the fact that Millennials have a lot of debt, it is not surprising that a huge part of this generation has savings that are less than $100,000.
You are constantly stressed about money
The final sign that you have a debt situation that is getting out of control is when you feel stressed when you think about money. There is nothing like dealing with too much debt to bring on a load of stress. The pressure of earning enough money to pay for the debt and still have enough to survive for the month can put a strain on you. Some people lie awake at night thinking about all the financial obligations that they have to meet. If you are feeling stressed with the mere thought of money, you need to take a look at your debt and try to solve it.
What to do if you have a lot of debt
The good news is, no matter how big the debt problem is, you can solve it. Obviously, the more debt you have, the more effort and sacrifice will be needed. You need to start by accepting that you do have a problem with debt. Sometimes, people are in denial about their credit situation. Most of the time, they are ashamed of the fact that they were careless about their use of credit and ended up with a lot of debt to their name.
While debt is usually a result of bad decisions, ignoring it will not make the problem go away. This is why you need to start acting on your financial situation. The longer you wait, the bigger the problem will get.
Here are some of the things that you might want to do to help solve your debt problem.
Set your priorities straight
First of all, you need to know your priorities. Most of the time, people with a bad debt situation are those who do not have enough income coming in. After all, you will use cash to make purchases if you have the extra money. But since you don’t, you resort to using debt in order to meet the expenses that you need to make. So in your cash flow is tight, you need to have a list of priorities that will allow you to focus on the important expenses. If you have a lot of debts and you have important expenses too, you might want to make sure that these are listed high on your priority list. This will ensure that they will always be funded.
Apart from your basic expenses, you need to make sure your debt payments are met so you do not have to worry about the interest rate increasing your balance. If you can identify the expenses you can cut back on, the extra money can be used to pay your debts. Putting more money into your debts will help you pay it off faster.
Stop accumulating more debt
Since you have a lot of debts, you need to stop accumulating more. According to statistics, Americans continue to increase their debts – especially their credit card debt. The Federal Reserve Bank of New York revealed that the credit card debt is now at $808 billion. We all know that when our monthly budget falls short, we turn to our credit card for help. You have to make sure that you lower your expenses so you will not go beyond your budget. If you stick to your budget, you will not be forced to borrow money in case your cash runs out.
Have a plan to pay off debt
Finally, you need to think of a concrete plan to solve your debt problem. There are so many debt relief options that you can use to help you. For instance, you can opt to consolidate your debts to enjoy better payment terms. It could be a lower interest rate or lower monthly payments. Your other options include balance transfer, debt management, or debt settlement. You need to understand your options so you will know the perfect solution to use for your own debt situation. What you have to remind yourself is that there is no one formula to get rid of debt. You have to know your specific debt situation and your payment capabilities. That way, you can find a repayment plan that you can afford and stick to.
Just remember that no matter how bad your debt problem is, there will always be a solution. What is important is your commitment. Regardless of what you choose, you need to commit to it and finish the plan so you can get out of debt.