Did you know that not all debt is bad debt? In fact, there is a level of debt that is actually financially healthy and beneficial to you. The trouble is that people cross the line and end up with more debt than they can afford to repay, leading to an unhealthy level of debt.
Knowing when your debt is too much debt is easier than you would think. However, many people ignore the early warning signs and wait until things become stressful before making a change. Luckily, there are a few ways to detect your debt may be headed towards bad debt.
- Are your payments always on time?
- Can you afford to pay more than the minimum payment each month?
- Will you be out of debt within 3 to 5 years?
- Are you paying for your debts out of your disposable income?
- Do you have enough money saved to cover your expenses for three or more months without income?
Answering “no” to any of these questions could be a sign that financial trouble has set in and your debts are at risk of default. It is important to understand that even if you are paying the minimum payments on time each month, it could still take you years to get out of debt. Any debt reduction plan that takes longer than 5 years to resolve is another sign that your debt burden is out of control. Borrowing from one line of credit to pay another or dipping into savings to pay for debt payments should also send up a warning.
The key is finding a solution that allows you to repay your debts in less than 3 to 5 years, with a payment you can afford that does not require the use of other lines of credit or your savings. If debt negotiations with your creditor are unsuccessful, consider a debt relief service or bankruptcy to facilitate your debt resolution plans.