What Are Some Signs That Your Debt Has Become a Problem?

Credit cards and other forms of consumer credit are a mixed blessing. On the positive side, credit allows consumers to make a large purchase--such as a house or a car--that may not be possible on a cash-only basis. Credit also eases cash flow constraints, so you can do your holiday shopping even if your bank account is low. On the negative side, buying on credit makes it easy to overextend yourself financially, and find yourself unexpectedly facing problem debts.

Sources of Debt

Credit cards, such as Visa, Master Card and American Express, are among the most common sources of consumer debt. By their design, credit cards allow consumers to make purchases without having the necessary cash. A credit card bill that's not paid off immediately becomes a debt that the consumer pays over time with accumulated interest. Mortgages, student loans and car loans are other common sources of consumer debt.

Credit Card Problems

Credit cards make spending easy. However, if you have difficulty paying your credit card bills on time each month, that's a sign of a possible debt problem. Missing payments, paying only the minimum due and using multiple cards to spread your debt are practices that lead to quickly-growing expenses that increase rather than reduce your debt. Financial advisers recommend that non-housing debt, such as credit cards plus student loans, should be no more than 15 percent of your monthly take-home pay.

Mortgage Problems

Late or missed payments on your monthly mortgage are also signs of a serious debt problem. A few late or missed payments can lead to substantial penalty fees that increase your overall debt. Too many missed payments put you on the road to foreclosure and you can lose your house. Financial advisers generally recommend that your monthly housing costs--mortgage or rent, plus other household expenses such as utilities and insurance--should be no more than one-third of your total take-home pay.

Credit Reports

Financial companies rely on credit reports to evaluate the credit-worthiness of consumers before issuing a loan, renting an apartment or approving a credit card. Check your credit report at least once a year to look for any problem areas that can lower your credit score and increase the overall cost of any debt you have. You can obtain a free copy of your credit reports from the major firms that provide them to the financial community (see the Resource section).