Credit can be a double-edged sword. Used appropriately, you can use credit to help you attain financial goals such as owning a home. Used recklessly, you could amass overwhelming debt that you can’t afford to repay. As you analyze your finances, look for signs that you might be abusing credit.
Debt to Income Ratio
Compare your total debt to your income. The debt-to-income ratio compares your total monthly debt payments with your total monthly income, and it serves as a useful yardstick for measuring your overall financial health. When you apply for credit, a lender will calculate this ratio. Examples of debt include a mortgage, car payment and credit card payments. If your DTI ratio comes in at 36 percent or more, you may have overextended yourself with too much credit. Calculate your own DTI by adding up your total monthly debt payments and your monthly income. Divide your monthly debt payments by your gross monthly pay and multiply the answer by 100 to arrive at your DTI percentage.
Worry and Anxiety
Overusing credit often creates significant worry and anxiety as you stress about your level of debt and wonder how you are going to make ends meet. Your finances might get so complicated that you have trouble remembering your debt amount. You may feel confused about how your financial issues occurred and perhaps you avoid talking about it with your spouse or partner.
If you routinely make just the minimum payment due on credit cards, this could be a sign of credit overuse. By only making minimum payments, you will make very little progress in paying down debt because most of the payment applies to interest and not principal. Usually, the reason for making minimum payments is that you have so many credit card balances that you cannot afford to make higher payments.
Once things get out of hand, it’s common to begin shuffling funds around in an attempt to manage the damage. You may deplete savings accounts, cash bonds before maturity, take out new loans, apply for additional credit, transfer balances, skip payments, post-date checks and utilize overdraft protection routinely as you strive to keep your head above water. If you are relying on credit to make purchases that you formerly purchased with cash because you have less money available, that's a big sign of credit overuse.
As credit woes advance, you may reach or exceed credit limits. Credit card companies may begin revoking your credit cards if you begin experiencing payment problems. Late payment and past-due notices may begin arriving in the mail. Receiving late penalty fees three or more times in a year is a sign of credit trouble, according to the University of Missouri Extension. Eventually, your accounts might hit collection agencies for collection.
- Bank of America: Keeping your Debt Load Manageable
- Consumer Financial Protection Bureau: Consumer Financial Protection Bureau Issues Rule to Protect Consumers from Irresponsible Mortgage Lending
- University of Missouri Extension: Warning Signs of Credit Trouble
- Women’s Institute for Housing and Economic Development: Credit Module
- American Credit Counseling Service: What is the Problem with Too Much Credit?
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