Do You Have a Debt Problem?

by Gary Foreman, Editor of The Dollar

Do you have a debt problem? Approximately one in three Americans have at least one debt in collections (The Urban Institute). They owe an average of $5,200. Another 38 million are living paycheck to paycheck (The Brookings Institute). So let's examine some indicators that will help you decide whether you have a debt problem. If you answer yes to any one of them it's time to recognize that you have a problem and to take action now.

You have one or more debts in collections. If you're being chased by collection agencies you have a debt problem. Typically a debt doesn't go into collections until it's at least 6 months overdue. The company you owe has decided that normal measures are unlikely to result in repayment so they've called in people who specialize in collecting bad debts. If you're in this situation read 5 Steps to Take If a Debt Collector Calls to find out your rights and responsibilities.

Have credit card companies raised your interest rates? Credit card companies are in the business of loaning you money. They want you to always be in debt to them. And, the more you borrow the happier they are. As long as they're confident that you'll be able to continue to repay on time. To help them determine whether you'll be able to repay, they've developed predictive models to help them. They'll monitor your financial statistics. And, if you look like you might not be able to continue to meet your monthly payments they'll jack up your interest rate. When they raise your rate that's a clear sign that you have a debt problem. You may say that their model is wrong. But history says they're right. You do have a problem.

Your credit score is below 630 or is falling. Your FICO credit score is a measurement used by lenders to determine how credit worthy you are. They collect data from a variety of sources over years to include in your score. Score above 690 and you're considered a good credit risk. Fall below 630 and you're deemed to be a bad risk. If your score is below 630 or it's dropping you have a debt problem.

More than 10% of your take home pay is going to repaying installment debt. Each family is different, but for most it's hard to keep up with payments (credit cards, personal loans, student loans, 401k loans) that consume more than 10% of your take home pay. With housing (rent/mortgage/insurance), transportation (payments/maintainence/insurance) and food taking up to 80% of your pay, it's hard to find more than 10% for credit card or other personal loan payments. Some people even have a problem at lower levels if other portions of their budget are higher than average.

Borrowing from one lender to repay another. This classic maneuver is a clear sign you have a debt problem. When you find that your income isn't enough to pay your debts the only way to stay current is to borrow from one to pay another. Once the bill juggling starts it's very hard to stop.

Your paycheck doesn't cover your bills. We all go through short periods of time where our expenses exceed our income. But, if that's been going on for 3 months or longer you probably have a debt problem. Most families try to make up the difference by borrowing. But that just adds a loan payment to the stack of bills you can't pay. If you regularly find that you need to borrow money to cover your bills you have a debt problem.

Worried about losing your home or car? You start worrying about losing your home or car when you're behind in your payments. Typically those are some of the first bills you pay. If you're falling behind on your mortgage or auto payment, that's a sign that you have a debt problem.

Currently have or had utilities shut off. Short on money? Most people will pay their utility bills first. Better to be late on the car payment than the electric bill. If you've been far enough behind to have any of your utilities shut off you have a debt problem.

Have you lost a job, incurred a major medical or other bill? Credit counselors report than many people's debt problem begin when they lose their jobs or have a major unexpected bill. If you don't have an emergency fund that can cover expenses or provide income until you find another job you'll probably use your credit cards. And, since you'll only be paying the minimum each month, the balance will continue to grow. You'll quickly have a debt problem.

Do money worries keep you up at night? Lack of sleep and stress will affect your health. If your debt is the source of your insomnia and stress, you likely have a debt problem.

Your student loans are greater than your annual salary. If you owe more on your total student loans than your annual take home pay you'll have a hard time making payments. You may be able to defer payments or get an income based payment plan, but that's just delaying the problem. Often you'll end up accruing more interest than your payments. That will make the balance grow. Pretty soon you have a debt problem.

You're approaching your credit limits. Thirty percent of your credit score is based on your credit utilization. That's the percentage of credit available to you that you've already used. Normally if your credit score is good the credit card company will offer to increase your credit limit. If they don't and the utlization rate goes up, that means that you're heading for a debt problem.

The amount you owe continues to increase. If you are simply making your minimum payments each month, chances are your debt is growing instead of getting smaller. If the amount you owe continues to increase it's clear that you have a an ongoing debt problem.

Money fights have become more frequent with your significant other. Spousal spending differences are enhanced when bills begin piling up. If you are not arguing over what you feel is a current debt problem, you're likely headed for one.

If you see yourself in any one of these indicators you have a debt problem. You will need to take action before your finances become critical.

Take Action Now:


If you answered yes to even one of these questions, the TDS ebook How to Conquer Debt No Matter How Much You Have can help you.

We will walk you through the creation of your own personalized debt payoff plan tailored to your debt burden, budget and lifestyle. You can read more about it here.

Not ready to address your debt problem? Here's what life could look like if you don't take action soon.

Don't ignore your debt!

Subscribe to our weekly Surviving Tough Times newsletter.

Debt Checklist
Get Ongoing Help:

Each issue of Surviving Tough Times will show you ways to save money that can be used to reduce your debt burden.

Your Email:

Click here to see a sample issue of Surviving Tough Times.

Share your thoughts with the editor.

Stay Connected with TDS

Get Out of Debt

Do you struggle to get ahead financially?

Surviving Tough Times is a weekly newsletter aimed at helping you stretch your dollars and make the most of your resources.

Debt Checklist

And get a copy of Are You Heading for Debt Trouble?
A Simple Checklist and What You Can Do About It
for FREE!

Your Email:

View the TDS Privacy Policy.