For many people the word ‘debt’ is a four letter word. A word that resonates a certain fear and anxiety, oftentimes associated with credit card bills and collection calls. However, taking on certain kinds of debt can serve as a means to an end. For example, borrowing money to go to college and earn a degree, starting a business, or purchasing a home or car.
Determining how much debt is too much debt can be tricky. If you have a good job, are in good health, and keep track of your finances, and interest rates, debt can be managed effectively. If used wisely, and for things that grow in value, like a home or education, it can be useful.
Certain forms of debt traditionally carry lower interest rates than others, such as mortgage loans or student loans. Other forms of debt carry higher or more variable interest rates, including credit cards and unsecured personal loans. Since these forms of debt carry higher interest rates, they are oftentimes much harder to pay down.
According to financial experts, a good rule of thumb is that the consumer’s total monthly debt obligation should not be more than 36 percent of his or her gross monthly income. The following tips can help you determine if you have too much debt.
Credit Card Balances Increase Monthly
One warning sign that the consumer has too much debt is when his or her credit card balance never seems to decrease from month to month. What this usually means is the consumer is only paying the minimum monthly payment on the bill, which includes mostly interest accrued that month. Additionally, if the consumer is skipping payments, this is also a red flag that he or she has too much debt.
No Retirement Savings
If the consumer is not financially able to put away money every month towards retirement, this can be a sign that he or she is paying too much toward debt. Many employers will offer matching payments in 401(k) plans for their employees, so if the consumer is not taking advantage of this opportunity by saving every month, he or she is missing out on essentially free money.
Credit Card Terms Not Working in Your Favor
Many consumers prefer to take advantage of promotional rates offered by credit card companies to pay off their debts. Some cards offer zero-percentage interest rates for a set period, normally lasting between 15 and 18 months, and after that time, the credit card’s rate will go up to either a normal interest rate or higher than normal rate. If the consumer is not able to conquer his or her balance during this promotional time, this fact could be a sign that he or she has too much debt to handle.
Regularly Dipping into Savings
If the consumer is regularly tapping into his or her savings account to pay off debt, this can also be a sign that he or she is carrying too much debt. The result of reaching into savings too much can be that the consumer completely drains his or her savings account, which can leave him or her in a bind in a financial emergency.
Reaching Out for Help
Another sign that the consumer may be drowning in debt is how often he or she resorts to reaching out for financial assistance. Some cards will offer cash advances that come along with higher interest rates but using these too much can become extremely cost prohibitive. The same goes for resorting to payday loans to pay off debts. These loans come with extremely high interest rates that make paying the amount owed difficult if not impossible. Lastly, if the individual is reaching out to friends and family for help with paying bills, while this method is preferable to payday loans or cash advances, it is also a warning sign that the consumer may be struggling with too much debt.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.