8 Signs You've Crossed From "Healthy" Debt to "Problem" Debt

By Tim Lemke. Last updated 9 January 2020. 1 comment

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We here at Wise Bread generally preach that all debt is bad — but there is such a thing as a healthy level of debt. Most people can get by with a modest amount of debt, especially if it's for constructive things like college or a mortgage, which can help you build wealth long term. Debt becomes a problem, however, when it reaches a certain magnitude or is wrapped up in credit cards or other unnecessary, high-interest loans.

Here are some signs your debt level has crossed from healthy to problematic.

1. Your Debt-to-Equity Ratio Is Holding You Back

Lenders, especially those offering mortgage loans, will often evaluate loan candidates based on a measure of debt versus income. People with a higher ratio of debt to equity are often denied the ability to borrow more. It's very difficult to get a mortgage loan if your debt-to-equity ratio is above 40%, and many lenders shy away from anything above 30%. People with high ratios are considered less likely to have the ability to repay money they owe. If you find that banks and other lenders are turning you down, it's time to reduce your debt load.

2. Your Debt Is Not in Student Loans or a Mortgage

It's debatable whether there is such a thing as "good" debt, but at the very least, student loans and mortgages can play a role in building wealth over the long term. Credit cards, however, are often what you use to buy "stuff" — clothes, gadgets, and other items that accumulate in your life and don't build any real value. If you have a mountain of debt, and most of it is the result of consumer spending, it's time to recognize that you have a problem.

3. Your Credit Score Is Sinking

Having some amount of debt isn't going to kill your credit score. In fact, it can help it, as long as you've consistently shown you can pay in full. But there's a point at which debt can be too high for credit bureaus to view positively. Order a copy of your credit report — you can get a copy from each bureau for free once a year — and check your score. A score above 700 means you're doing well. But lower scores could negatively impact the interest rate if you borrow for a home, a car, or other need. A score that's too low could make it impossible for you to borrow at all. (See also: 10 Surprising Ways to Negatively Affect Your Credit Score)

4. You're Maxing Out Those Credit Cards

When you are finding yourself increasingly in the hole due to credit card borrowing, that's a bad sign. Interest rates on credit cards are often very high, so if you can't pay off the balance in full each month, your debt problem only grows. Credit cards have borrowing limits, and you should rarely come close to hitting them. If you're hitting those limits — or even worse, opening new credit cards to allow for more spending — that's a sign that your debt problem is severe.

5. You're Not Paying on Time

You can have debt and maintain a solid credit score, as long as you pay your bills when they are due. People see their credit scores decline when they begin paying bills late. Credit Karma reports that for people with with fair to excellent credit scores (600 or above), the on-time payment rate was more than 95%. But that dipped to 75% for those with scores between 500 and 599, and 60% for those with scores under 500.

6. You've Considered Ignoring Important Bills

I once had a friend who was struggling with debt to the point that he would consider pushing back or even blowing off payment of his rent, utilities, and other key bills. His feeling was that as long as he wasn't evicted and the lights stayed on, he'd be able to manage. But this is living on the edge and a sign your debt level is absolutely unhealthy.

7. You Have No Emergency Fund

If debt has you stretched so thin that you can't save anything for a rainy day, that's a problem. You may feel like you're getting by okay, but all it takes is one dead heat pump, one surprise medical emergency, or a blown car engine for you to face true financial hardship.

8. It's Hurting Your Relationships

Couples argue about money frequently, even when they're financially stable and have money in the bank. But the carriage of heavy debt can lead to serious strain between your loved ones. If you're constantly arguing about the level of debt that you have, it's not healthy and bears paying down.

Do you recognize yourself in any of these signs of unhealthy debt?

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Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Guest's picture
Nate Matherson

I would agree that student loan debt could be considered "healthy" debt. While student debt isn't fun.. it is a tool that if used responsibly can help a lot of people who could otherwise not afford an education.

Great article! Will be sharing.

Nate Matherson

Guest's picture
Ryan Smith

I agree that not all debt is bad. You need debt to leverage and when used wisely, leverage can help you get ahead quicker. However, the key is to be wise!

On the topic of ignoring bills, I note that the #1 problem for people in serious amounts of debt in Australia is ignoring your debt. It's amazing how many people know they're in trouble but pretend it's not happening and carry on as normal.