Too Much Debt

 

Having a large amount of debt does not automatically mean you have bad credit. There are many individuals who carry extremely high levels of debt, yet they faithfully pay their creditors each month. Although, these people may be severely overburdened financially, they often possess a very good credit score.

However, there are several negative side effects that are brought about by excessive debt. These include just making the minimum payments because heavy debt load often make it impossible to make much more than the minimum payments. It is very difficult to lessen debt once you reach the level of paying only the minimum because minimum payments generally cover little more than accrued interest. This creates a scenario where someone could continue to pay their creditors indefinitely.

Credit card companies look heavily at credit scores and many times a person who can only afford to make minimum payments will choose to apply for more credit in order to temporarily gain some financial relief. Generally credit card companies do not consider levels of debt. If they meet the necessary income requirements and credit scores they will probably issue them more credit. This places the individual in a deeper financial hole and increases the chance of bad credit in the future.

Another problem is a bad debt to income ratio. This ratio is determined by taking your monthly minimum debt payments and dividing by the total amount of monthly income. Income would include salary, commissions, bonuses, etc. The higher this ratio the more difficult it will be to get approved for a home mortgage or a car loan.

Many people are under the impression that as long as they can maintain their minimum payment obligations then they are financially stable. This simply is not the case. In the long run high levels of debt greatly increase the chances that you will experience credit problems in the future. In the short run you will possess a very poor debt to income ratio which can make it extremely difficult to obtain a new house or car. If you do manage to obtain a loan, the interest rate will almost certainly be higher.

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