The 2007 economic downfall made many Americans realize that they have too much debt. Debt encompasses credit card balances, and student, car or home loans. According to the University of Wisconsin, the average American has a credit card balance of $7,000, which many struggle to pay on every month. Although having credit is a necessity, there are distinct signs that you may have too much debt.
Income
According to the University of Wisconsin, an ideal income to debt ratio is 30 percent or lower. This means that 30 percent of your income goes towards your debt. A high income to debt ratio is 45 percent or more. At this point, creditors will see you as having too much debt, and may refuse you credit. If you are offered credit, your interest rates will be high.
Credit Cards
Credit cards may be necessary for young adults to build credit, but are tempting to use for unnecessary purchases. Credit card companies check your credit occasionally and may extend your credit line, making such purchases even more tempting. The situation becomes even more dangerous once you have multiple credit cards. According to kimberlycredit.com, you should have no more than three credit cards. Once you rack up multiple credit cards, it is harder to pay more than minimum payments, making it nearly impossible to pay them off in full. The University of Wisconsin states that if you owe $8,000 in credit card bills with an 18 percent interest rate, it will take over 25 years for them to be paid.
Future Money
You know you have too many bills than you can handle if you have to borrow money out of future paychecks in order to pay your debts. Such cash advances may seem to temporarily solve the problem. However, cash advances have fees attached to them, which vary by company. Thus, you will actually receive less money out of your next paycheck and will have even less money to pay the following month's bills. This type of cycle may be difficult to break.
Effects
Excessive amounts of debt can have its toll on your physical and emotional states. You know you have too much debt if your situation causes you anxiety and consecutive restless nights. Too much debt can also take its toll on your relationships. For example, you may be ashamed of your income to debt ratio and lie about your spending habits to loved ones. Excessive debt can be difficult to overcome, and the stress can affect other family members, especially if they have to share the burden.
Prevention/Solution
The most obvious solution is to stop adding to your debt. However, there may be situations which you may not have control over, such as sudden unemployment or unexpected medical expenses. If possible, find other means of income, such as a second job, to help pay down your debt. If this is not plausible, look into debt consolidation. Debt consolidation may adversely affect your credit score temporarily, but it may be worth it if you save money and anxiety. Plus, if your income to debt ratio is high, your credit score may not be good anyway. Seek professional credit help for more advice to your unique situation.
Member Comments