Opportunities to borrow can present themselves frequently, from revolving credit to student loans to auto loans. If you don’t watch your finances carefully, you might overextend yourself with too much debt. The consequences of excessive borrowing could take a far-reaching toll on your financial health and your credit score.
Borrowing too much could overextend you, if you spend more than 20 percent of your income on debt not connected to your housing. Track the combination of secured and unsecured debt. Secured debt includes loans attached to a specific asset, like your car. Unsecured debt isn’t attached to an asset – credit cards, student loans and medical debt fall into this category. If you max out your credit cards, your minimum payments will rise in conjunction with the higher balances. As a result, you might begin having trouble making your payments, and late payments and delinquent accounts could follow.
Interest and Fees
Interest goes hand-in-hand with borrowing money. If your debt comes with high interest rates and fees attached, the cost of borrowing can climb quickly. To minimize the interest you pay on debt, work to pay down your accounts with the highest interest rates first. You also might explore consolidation loans with lower interest rates to combine your debt into one loan.
Credit Report Woes
Borrowing too much will hit your credit report with potentially negative information. If your credit card balances rise higher than 30 percent of your total available credit, your credit score will take a hit. The use of your available credit, or utilization rate, accounts for approximately 30 percent of your total credit score.
Sometimes, in a negative financial trend, you begin seeking too much new credit to finance your overspending. Opening a number of new credit card accounts in a short time usually dings your credit score. Not only will your score decrease from the hard inquiry of each credit check, but your credit report averages the age of all of your credit accounts, too. Several new entries will skew this number. Also, creditors tend to become concerned when a consumer opens several new accounts, because of the possibility of overspending beyond the ability to repay.
- Wells Fargo: Yes, You CAN Get Out of Debt
- Federal Trade Commission: Coping with Debt
- Equifax: Your Credit Score: Good Debt vs. Bad Debt
- Better Business Bureau: Going Forward → How to Improve Your Credit Score (and why it will help you)
- Experian. "What Is a Credit Utilization Rate?" Accessed June 24, 2020.
- Consumer Financial Protection Bureau. "How Long Does Negative Information Remain on My Credit Report?" Accessed June 24, 2020.
Kathryn Hatter is a veteran home-school educator, as well as an accomplished gardener, quilter, crocheter, cook, decorator and digital graphics creator. As a regular contributor to Natural News, many of Hatter's Internet publications focus on natural health and parenting. Hatter has also had publication on home improvement websites such as Redbeacon.