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Do You Have Too Much Debt?
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(image: https://picography.co/page/1/600)Are You In Too Much Debt?
Take the sum of certain kinds of debt and compare the total to income to determine if there's an issue and how to proceed.
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Last updated Aug 5, 2021 11:28AM PDT
Editor: Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in roles including copy desk chief and team director of design and editing. Previous experience included news and copy editing at many Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communication and journalism in Iowa's University of Iowa.
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Are you concerned about having too much debt? Looking into your debt-to-income ratio can help answer your question. Add your monthly debt obligations (things such as auto loans, housing payments and credit card debts) and divide by your monthly gross income. Debt loads in excess of 36 percent of your DTI could be difficult to pay off and hinder your ability to obtain credit.
If you can't keep on top of your payments, or you're facing stress or sleepless nights If so, it's time to create a plan to consider or research .
Watch your debts dwindle
Create an account to link your credit cards, loans and accounts to keep them all in one place.
Figure out your debt load
Utilize the calculator to find out if there is a problem. The calculator will also offer recommendations for what to do next.
Enter various debts -- such as credit card payments and medical bills as well as your earnings to this tool. The student loans and mortgages are typically less problematic forms of debt, so put them aside for the moment.
View your result for these riskier kinds of debt with regard to possible solutions:
If it's less than%, your debt load is considered acceptable based on your earnings.
If it's between 36% and 42% , consider DIY techniques like
If the ratio is 43% to 50%, take action to lower your debt burden; consulting a may be helpful. If it's 50% or more your debt load is high-risk; think about seeking advice from an lawyer.
Consider these guidelines as general guidelines. "There is no set standard for credit," says David Nash who is a certified financial advisor with Magister Wealth in San Antonio, Texas. He adds that "If your debt level is increasing as a percentage of your income, it means that you need to make tougher choices in the tradeoffs to be considered."
Distinguish between good debt and bad debt
It's important to separate the good from the bad, and the harmful. A mortgage that has an annual percentage rate of 3.5%, for example could be considered differently as a credit card with a 20% APR.
What's a good loan?
If you have an interest rate that is fixed and low, it is also when you take out the loan can be used to buy something that grows in value, like a house, business or college education. It's also beneficial when the interest is tax-deductible like the majority of student and mortgage loan interest.
What is bad debt?
Loans with high or variable interest rates that are used to purchase items that decrease in value or are exhausted. Some examples include personal loans for purchases that are discretionary, such as holidays and auto loans that last five years or longer or loans with high interest that have increasing amounts.
What's a toxic debt?
No credit check and with APRs over 36 percent, loans so long you pay more than the item is worth, or loans that require collateral that you cannot afford to lose, such as your vehicle.
The burden of bad debt is the high cost of interest and can limit your savings, cash flow and the ability to borrow for purposes like purchasing a house According to Erika Safran who is a certified financial planner who works with Safran Wealth Advisors in New York City.
But a low-interest mortgage that is affordable for you shouldn't keep you up at night.
Common warning signs of problem in the area of debt
Your debt balance is not decreasing despite your regular payments.
You're living paycheck-to-paycheck and have no cash at the end each month.
There's no reason to contribute money into a retirement plan that's sponsored by your employer since you're in need of the funds.
You're unable to build an of at least $500 to safeguard against financial unexpected events.
Credit cards are used for cash advances.
Are the other forms of debts a problem?
The following guidelines will give you an idea of how much is considered to be too much in these debt categories and how to handle it if you're overloaded:
Housing
Guideline: When buying a house, you should limit your mortgage costs to . This calculator can help you determine .
How to deal with an overwhelming situation: Think about , or consider downsizing as well as moving to lower-cost location. If you're refinancing or switching homes in your 40s or 50s, consider a in order to have no mortgage when you retire.
Student loans
The rule of thumb is to not borrow more for your education than the amount you anticipate earning within your first year in the workforce. If you expect a starting salary of $40,000, for instance, limit your loans to $10,000 annually for a four-year degree. is a common regret among students loan recipients, as per NerdWallet research.
How to handle an overflow: Look into your options, such as income-driven repayment plans and refinancing.
Car loans
Guidelines: Experts suggest that your auto expenses (including -- should stay of your take-home pay. Car loans are required to be less than four years and, ideally, coupled with 20% down. So you don't have to spend years owing more than the value of your car.
How to handle an overloaded vehicle: If you have an , consider or selling your vehicle for a more affordable one.
Medical debt
The guideline is that medical debt is a special situation because health-related expenses are typically out of the consumer in their control. This kind of debt is generally interest-free but the amount involved can make it unmanageable.
How to deal with an overload You can try bargaining with the billing office to lower the amount to be paid or arrange an affordable payment plan. You can do this on your own, if you are able however, you might need to look into .
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