How Many Loans is Too Many?

Nicolas Cesare  | 

In the past we’ve talked about the difference between good debt and bad debt. You might know that good debt is the sort that helps you achieve modest fiscal goals for yourself while improving your credit as you pay it off in a timely fashion. Bad debt, on the other hand, is debt that becomes unmanageable for you, damaging your credit and forcing you to seek out credit repair later on down the road.

In the abstract, these principles are fairly easy to understand. However, as we find ourselves on the fiscal front lines of our lives, it can be harder to tell when we have crossed the line. It’s critical to our financial health that we be able to distinguish between good and bad debt in our lives — we must be able to tell which loan is the one that will break our backs. Being able to tell when you’re about to cross the line is critical when it comes to taking responsibility for your debt and repairing your credit.

Don’t Spend More Than You Make

If you’re spending more on debt than you’re bringing home in income, then you must reevaluate your financial situation! Running a deficit from month to month is the easiest way to tank your credit rating, so don’t do it!

Of course, this is all easier said than done. If controlling debt and fixing your credit were as simple as changing a minus to a plus, then surely nobody would have debt problems. How is the average person to tell if she is spending too much or carrying too much debt?

Keep a Budget

The best way to keep track of your finances from month to month is to create a budget for yourself and stick to it. In order to create a budget, you will want to split your financial activity into two halves: spending and income. Your biggest source of income is probably your paycheck and, unless you like to freelance or work a side gig, it’s probably your only reliable source of income.

Once you have an idea of how much you make from month to month, you can start to think about how you want to dole that out in spending. The first things you should make room for in your budget are needs. These are usually things like housing and groceries, but, if you’re carrying any debt, this must include all of your minimum loan payments!

By budgeting to cover your needs, you will be able to see if you are making all of your loan payments for the month. With a budget already in place, you will also be able to determine very quickly whether or not a new loan will be too much of a financial strain. Keep in mind that taking out more loans than you can pay back will seriously hurt your credit.

Once you have a budget, keep in mind that it’s a good idea to have some surplus each month. So even if you have can add another loan payment on the heap without running a deficit each month, doing so will cut into your savings.

Prioritize the Debt You Take On

Not all loans are created equal. Some loans, like mortgages and modest student loans, are a common — if not necessary — part of life. You’re probably already paying off your mortgage and you may be close to eliminating your student debt. These are both good things, as doing either will help improve your credit, possibly repairing it if you have had some financial trouble in the past.

Mortgages and reasonable student loans are the kind of debt that you should be OK with taking on. Both of these should take priority over other forms of debt. If possible, avoid taking on debt for things like excessive credit cards, luxury items, as well as mortgages or student loans beyond your means. Taking out this sort of debt can do severe damage to your credit when you cannot pay it down, causing you to need credit repair in the future.

In summary, creating a budget will help you to determine your spending power and — by extension — how many loans you can afford to take on. If you are considering taking out a loan, check the minimum payment amount against what you have left in your budget. By practicing good monetary habits when it comes to debt, you can maintain strong credit or repair your credit if necessary.

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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.

This post was updated February 28, 2019. It was originally published July 26, 2017.