Debt isn’t always a bad thing, but be careful about taking on too much…

It gets a bad rap, but debt is not necessarily always a bad thing.

In the business world, Fortune 500 companies sell off debt in the form of bonds to raise capital and expand operations. They create jobs in the process.

In the consumer world, families routinely finance the purchase of a home by taking on mortgage debt.

If they choose wisely, financing the purchase of a home can build wealth. In both cases, debt can be helpful. However, there is such a thing as too much debt.

When debt, either business or personal, spirals out of control, life can grind to a halt and money worries can become all encompassing. If you’ve struggled with more debt than you can handle, you know what I’m talking about.

So how do you know if you have “too much debt?” We’ve provided a list below which will help you evaluate whether your debt load is healthy or if it may be growing beyond your control.

Have you been denied new credit?

By definition, taking on debt means borrowing money. One of the big factors lenders look to in underwriting a new loan is the current debt load of the prospective borrower. If you’re consistently being denied for new credit,  it may be a sign that you are reaching the maximum level of debt you can comfortably handle.

As Wells Fargo points out in their Five Cs of Credit:

Lenders need to determine whether you can comfortably manage your payments. Your past income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.

On the other hand, if you’re still able to access credit, it may be a sign that your debt is under control. This is especially true today where underwriting restrictions have become far more stringent than they were in the Wild West days of 2005.

Are you late on payments?

Missing routine payments is a sign that you may be carrying too much debt. Unfortunately, getting in a cycle of paying late when a paycheck finally comes in or a new loan goes through, carries with it a cycle of late fees and compound interest which can make it more difficult to get out of debt. If you’re consistently paying late, it’s a sign that your debt may be an issue.

Similarly, paying debt with more debt is a sign of trouble. For example, if you’re using one credit card to pay another, you may already be in problem debt territory.

Are creditors or debt collectors calling you at home?

For the seriously indebted, this is a big one. Anyone facing bills that they cannot pay knows that creditors call non-stop. Sometimes they will even sue. If you’re getting collection letters and phone calls or if you are the defendant in a collection lawsuit, it is certainly a sign that you have more debt than you can handle.

Do you have savings?

To some, this next question may seem slightly counterintuitive. After all, this is an article discussing too much debt, not how to get ahead. But therein lies the problem, having a year or so worth of living expenses in the bank is not getting ahead, it’s insurance against falling behind. If all of your money every month goes to living expenses and debt, it may be a sign that your debt to income ratio is an issue. Debt to income ratio (DTI) can be roughly defined as the percentage of your monthly gross income that goes towards paying your debts. As I pointed out above, lenders use DTI to evaluate the creditworthiness of new borrowers. A DTI that is out of whack indicates you’ve borrowed as much as you can handle, you don’t have the capacity for new debt.

Do you ever pay down debt?

Perhaps you pay your monthly bills on time and never hear a peep from creditors. That’s great, but are you able to contribute anything to actually paying down debt as opposed to paying interest. Many types of consumer loans, including high interest credit cards and payday loans,  carry with them extremely high rates of interest. The monthly payment that borrowers make often goes entirely to satisfying the interest on the loan. This prevents the principal from ever being paid down and traps the consumer in a nightmare cycle of feeding the credit card interest monster. If this sounds like you, it is a sign that you have more debt than you can handle.

Is debt constantly on your mind?

Now we get into less tangible, but still relevant factors. For example, if you’re a man and you’re thinking about your debts as much as you are about sex, you know there’s a problem. Problems with debt can become all consuming. As I’ve written in the past:

It’s never the actual red in the ledger that causes debtors to suffer, it’s the worry about supporting a family, collection phone calls, lawsuits, foreclosure and the myriad of other mental beatings the seriously indebted are forced to endure. Whether it’s fear of having a credit card rejected at the grocery store or concern over a pending wage garnishment, consumers who find themselves in debt are constantly reminded of their predicament. They can’t escape mentally. The debt follows them wherever they go, becoming their constant companion, causing incredible stress that breaks up marriages and ruins friendships.

Is your health suffering?

It’s no secret that excessive stress can lead to poor health, however, most people don’t make the connection between a decline in health and an increase in debt. Make no mistake, the two can be linked. Web MD has published an informative article on the link between debt stress and poor health.

The [debt] stress may be correlated with physical symptoms like heartburn, headaches, and abdominal pains. “If you have a knot in your stomach all the time, or if you’re feeling anxious and worried a lot of the time, that would be an area of concern,” he says. “These are signs that stress is starting to take a toll and you should give it more attention than the average person.”

If you’ve noticed a recent decline in health, or new stress-induced symptoms, debt stress may be to blame. If this sounds like you, consult a doctor.


Unfortunately, there is no magic formula for determining whether you have taken on more debt than you can handle. Debt to income ratio can be instructive, late payments on existing debt may be a sign, but each consumer’s situation is different.

Walter Metzen

Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
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