From the cost of housing to groceries, life is anything but cheap these days. For many of us, it can be easy to let debt creep up…. But exactly how much debt is too much?
Knowing How Much Debt Is Too Much
You may have a nagging feeling that you’ve taken on too much debt — or breathing space to feel like you could take on a little more. But in fact, knowing how much debt is too much starts with calculating what’s called your “debt-to-income ratio.” This looks at how much debt you’re responsible for paying each month compared to what you earn monthly. In general, experts say your debt-to-income ratio should be less than 30%.
There are also other signs to watch out for that indicate you may be in over your head. “The more lagging indicators that are more of a flashing red light are: you're making minimum payments on credit cards, you're robbing Peter to pay Paul, you're taking out loans to stay current on other obligations, or you're borrowing from retirement,” explains Greg McBride, Chief Financial Analyst for Bankrate.com.
Having too much debt can have myriad negative consequences, some of which you might not expect. Here’s a look at some of the ways debt can negatively impact your life, and why it’s important to try to start paying it down, ASAP.
With Too Much Debt, Emergencies Can Be Extra Challenging
Having too much debt can put you in an extra precarious situation if an emergency arises. For example, if you were to lose your job unexpectedly or encounter a medical emergency, your monthly debt obligations might be such that there’s no room in the budget to cover both the emergency and your bills, leaving you to have to make a terrible choice.
“There are lots of circumstances where we have no control over things, and carrying too much debt for too long puts you at a lot of risk,” says Matt Schulz, Chief Credit Analyst at LendingTree. Having too much debt likely means you have less money to tuck away in your emergency fund. It could also hinder your ability to obtain the assistance you need as you navigate a rough patch in life. For example, too much debt can tank your credit score (more on that in a sec), making it more difficult (or expensive) to be approved for a credit card or a loan, says Schulz.
Debt Can Keep You From Reaching Your Long-Term Goals
Racking up too much debt can keep us from reaching our long-term financial goals, such as buying a house or saving enough for retirement, which can have a far-reaching effect on our lives. “That's a big deal because money that's going towards debt isn't going towards an emergency fund, a college fund or retirement fund, mortgage down payments, a house remodel, or things that can really help you financially going forward,” notes Schulz. “It really does tie your hands in a lot of ways.”
Debt Can Damage Your Credit Score
Having too much debt can take a significant toll on your credit score, and the financial ripple effect continues from there. While many of us know that a lower credit score will translate to higher interest rates when we need to borrow money for a house, a car, or any other type of loan, it can also impact us in areas we might not expect. “It can even [result in higher] insurance premiums or cell phone bills,” says Schulz. “When your credit score gets hit, it just makes so many other things more difficult.”
Debt Can Limit Future Career Opportunities
Believe it or not, too much debt can even stand in the way of advancing your career. “It could be a barrier to opportunities. Whether that’s funding future education needs, accumulating seed money so you can start a business someday, or even just accumulating savings so that you can engineer a career change,” McBride says.
According to a report from the National Association of Background Screeners, 95% of companies complete some kind of background check on prospective employees. 16% of employers say their background check includes credit or financial checks on candidates. If your credit or financial history isn’t the greatest, it could indicate a lack of responsibility to a potential employer, which may make that company think twice about hiring you.
Debt Can Impact Your Health
If you’ve been in debt, you likely know how stressful it can be. Having too much debt long-term can take a serious toll on your physical and mental health. “The physical wear and tear on people caused by long-term financial debt is something that isn't talked about enough,” says Schulz. “Honestly, overwhelming debt just consumes your life.”
If excessive debt is keeping you up at night, after you get on a plan to pay it down (which is always the best thing you can do to start feeling empowered!) Schulz recommends simple de-stressing techniques including simply taking a walk, a yoga class, or any other physical activity that can help you decompress.
When You Know How Much Debt Is Too Much…And You Have “Too Much”
Keeping debt down is essential to a successful financial life. If you’ve answered the question “How much debt is too much?” and you know you fall into the “too much” category, know that by taking the right steps, you can dig yourself out. “Recognizing the problem is the first and most important step,” says McBride. “What you do next has to be geared toward putting a plan into effect and making progress, whether you are able to look yourself in the mirror and commit to doing it on your own or whether you need some assistance.”
One of the best places to seek assistance is at your local credit union. Ask your credit union for recommendations on how to get back on track and formulate a plan to pay your debt off, ASAP. For many, paying down debt begins with baby steps, some of which are noted here. If you want to take a deeper dive into tackling your debt with help from a dedicated coach, check out FinanceFixx, HerMoney’s 8-week program to help you build better money habits that can last a lifetime.
