5 Questions About Debt you Should Know the Answers to

The subject of debt is not always an easy one to talk about. In general, money can be a touchy subject, and any time you feel embarrassed about your situation or about the fact that there may be some gaps in your knowledge, it can be hard to step up.

So, whether you feel like you feel like you’re missing financial information you should already have, or you don’t want the people around you to know exactly how much debt you’re carrying, it’s completely normal to feel a little uncomfortable when you get on the subject of your financial situation.

With that in mind, we want to clear up some of the questions you may have about the world of debt to help you approach this subject from a place of knowledge and understanding, not fear and isolation.

1. How do I Know if I Have too Much Debt?

In some cases, taking on debt is hard to avoid. If you’re looking to buy a home, a car, or make some other large purchase that could take years and years of saving, applying for some type of loan can help to speed up the process. Having said that, it’s important to know what a reasonable amount of debt to take on is, and what going overboard looks like.

Person thinking about questions about debt.

The truth is, there’s no single answer. Too much for one person may be within the confines of what another person can afford. In the end, the amount of money you have coming in and the amount that you’re spending on a regular basis is going to be one of the main factors that’ll determine how much debt you can afford to take on.

If you want to get an idea of what this number looks like, you can go through these steps:

  • Go through your budget and tally up all of your fixed monthly costs, like your utility bills, your phone bill, your current debt payments, and whatever else applies to you. You should also include essential variable expenses like your grocery bills and do your best to account for these things as accurately as you can.
  • Next, add up the total income you have coming in every month, including all your primary and secondary sources of income.

From here, you can determine your debt-to-income ratio, which is how much money you have coming in versus the amount you owe in debt payments. The number you get here (expressed as a percentage) is a good way to get an idea of the state of your finances and to give you some indication of how well your budget is working. If you’re considering adding more debt onto your plate, make sure you’ve calculated your debt-to-income ratio first.

If you’re trying to get approved for something like a mortgage, you may have a hard time if your debt-to-income ratio is too high, so you might have to make adjustments. You also don’t want to get into a situation where this number starts to creep up to a point where most of your money is tied up.

2. How Much Debt Can I Take On?

In terms of the amount of loan debt that you can take on from a personal perspective, one key rule is to make sure you never take on more debt that you can afford to pay off.

On top of that, like we mentioned in the last section, you’ll want to be mindful that you don’t let your debt-to-income ratio get too high. If it does, you may have a hard time dealing with things like emergency expenses, especially if you’re looking to borrow funds to handle your emergency. While every financial institution considers a variety of factors when it comes to assessing you loan application, your debt-to-income ratio may play an important role.

Does an emergency line of credit make sense for you, and how do they work? Learn more!

Person making a payment with their credit card online.

3. Why is my Credit Score Important?

When it comes to getting approved for a loan, your credit score can often be one of the most important aspects of your financial profile. It’s a three-digit number that is used to summarize your history as a borrower. It helps financial institutions decide how likely they think you are to repay what you’ve borrowed. The higher it is, the better.

If your credit score isn’t strong, you still may be able to get approved for a loan, but there’s a good chance that the rates of the loans you’ll have access to will be relatively high. In the end, this raises the cost of debt. A poor credit history can also make it harder to get approved for large scale loans like mortgage.

4. What can I do to Potentially Impact my Credit History?

When it comes to the breakdown of what makes up your credit score, there are five main facets of your financial profile that credit bureaus look at. These are:

  • Your payment history (35% of your credit score)
  • The amount of debt you’re carrying (30%)
  • The length of your credit history (15%)
  • New credit accounts (10%)
  • Credit mix (10%)

While your credit score is made up of a number of diverse factors, by integrating healthy financial habits into your life, you may be able to impact your credit score. For example, the most important category here is your payment history. This means that you’ll want to make sure that you make on-time payments for all your accounts that get reported to a credit bureau.

Even in situations where your payments aren’t reported, missed payments often are, so you’ll want to make sure your payments are on time for all your accounts.

Some other things you might want to consider doing to potentially impact your credit history include:

  • Not applying for a large number of new credit accounts in a short period of time.
  • Lowering the amount of debt you’re carrying.
  • Not cancelling old credit accounts.

It’s also better to have a variety of credit accounts, but that doesn’t mean that you should apply for debt just for this purpose.

5. What Happens if I Don’t Pay my Debt?

We already touched on it briefly, but if you don't make your payments on your credit accounts, or even on things like internet and/or phone bills, your account could default.

Person making a credit card purchase on their tablet.

Keep in mind that unpaid debt can affect you in ways like:

  • Serious damage being done to your credit history.
  • Higher interest rates when applying for loans in the future.
  • A harder time finding employment, as some employers will check the state of your credit as part of the hiring process.

The best thing you can do is to not let your situation deteriorate to this point. After all, the consequences can be serious, so do your best to pay off your debt in a timely manner!

Ask the Right Questions 

Like we said above, asking debt questions can put you in a vulnerable position, and your instinct might be to avoid the subject altogether. The problem is that avoiding any issues you might be having isn’t going to make them go away.

If you’re struggling with paying off debt, the best thing you can do is to start by educating yourself. From there, you can come up with a debt management plan that’s suited to your situation, or speak to a professional that can help.

Debt free living can sometimes feel like a lofty goal, but with the right information in hand, hard work, and patience, it may be within your grasp!

Disclaimer: This article provides general information only and does not constitute financial, legal, or other professional advice. For full details, see CreditFresh’s Terms of Use.

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