13 Warning Signs That You Have a Debt Problem

If you're not sure if you have a debt problem, Laura breaks down 13 warning signs you should know. You’ll learn red flags to watch out for that could prevent you from building wealth and solutions to turn around your financial life.

Laura Adams, MBA
8-minute read
Episode #564

Debt is a powerful tool that can help or hurt your finances depending on how you use it. Savvy consumers know how to leverage low-interest debt to purchase assets that are likely to increase in value over time, such as a home or business. Education debt can also pay off over time if it allows you to earn more.

But many people abuse debt and allow their finances to get out-of-control. In this post, I’ll cover 13 warning signs that you may have a debt problem. You’ll learn red flags to watch out for that could prevent you from building wealth and solutions to turn around your financial life. 

13 Warning Signs That You Have a Debt Problem

  1. You don’t know what you owe.
  2. Your debt-to-income ratio is too high.
  3. Your interest-to-income ratio is too high.
  4. You can only make minimum payments on cards.
  5. Your credit cards are maxed out.
  6. You can’t pay bills on time.
  7. You’ve borrowed to pay your bills.
  8. You overdraw your bank account.
  9. You don’t have savings.
  10. You’ve been turned down for new credit.
  11. Your finances cause you to lose sleep.
  12. You lie about your finances.
  13. You’re getting calls from debt collectors.

Use the following information about each warning sign to curtail a debt problem before it’s too late.

1. You don't know what you owe.

If you don’t know how many debts you have or their approximate balances, you need a reality check! If you’re avoiding opening your bills or looking at credit card statements because you don’t want to see the balances, then you already know you have a debt problem, and it’s time to do something about it.

Take the time to create a spreadsheet listing each account name, number, interest rate, and the amount owed. In general, it’s best to tackle debts with the highest interest rates first, such as payday loans and credit cards, since that gives you the most potential savings.

Hiding from a financial problem doesn’t make it go away. Knowing where you stand with debt is the first step to getting it under control and improving your entire financial life.

2. Your debt-to-income ratio is too high.

Your debt-to-income (DTI) ratio is a key formula expressed as a percentage that lenders use to evaluate you, and you can use it, too. To figure it out, add up your total monthly debt payments—including credit cards, loans, and your rent or mortgage payment—and divide that amount by your gross (pre-tax) monthly income.

For example, if you earn $5,000 and your debt totals $2,500 per month, your DTI is 50% ($2,500 / $5,000 = 0.5). Most lenders consider a DTI above 40% too high, especially when you’re applying for a mortgage. So a 50% DTI means that you have more debt than you can handle for your income.

But even if you don’t plan to buy a home or get a large loan anytime soon, calculating your DTI is a good way to monitor your financial health. Watch it over time to make sure that it decreases and never goes up.

The solution to a high DTI is to pay off debt by cutting expenses, increasing your income, or doing both. Additionally, paying down your outstanding debt balances boosts your credit. That may allow you to qualify for debt optimization tools, such as a balance transfer credit card or a low-interest personal loan.

3. Your interest-to-income ratio is too high.

Another revealing ratio compares the total of your monthly interest charges on all your debts to your gross income. If it’s more than 20% of your monthly income, take quick action to reduce it.

Paying high inters rates on debt means that you may not have enough left over each month to cover your basic living expenses, such as housing, food, and transportation. Try shifting balances to a low-rate personal loan or taking advantage of a 0% interest balance transfer credit card to get some financial breathing room.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.