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Is Your Debt Too Many Debts?
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Are You In Too Many Debts?
Add up certain types of debt and compare the amount to income to determine if there's a problem and how to proceed.
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Last updated Aug 5, 2021 11:28AM PDT
Editor: Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Previously, she spent 18 years with The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Prior experience includes news and copy editing at many Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in journalism and mass communications at Iowa's University of Iowa.
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Wondering if you have excessive debt? Looking into your debt-to-income ratio can help answer your question. Add up your monthly obligations to pay (things such as auto loans as well as housing and credit card debts) and divide it by your monthly gross income. A debt load that is higher than 36% of your DTI is difficult to pay back and can make accessing credit more challenging.
If you're struggling to keep up with your bills or are experiencing anxiety or insomnia If so, it's the time to come up with a strategy 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 below to figure out whether is problematic. The calculator can also provide recommendations for what to do next.
Enter all debts -- for example, credit card bills and medical bills -- and your income to this tool. Students loans and mortgages are typically less troublesome forms of debt, therefore, set them aside for the moment.
Check your results for these riskier types of debt with regard to possible solutions:
If it's lower than 36%, your debt load is within the limits of being reasonable based on your earnings.
If the number is between 36% and 42% , consider DIY methods like or
If your debt is between 43% to 50%, you should take steps to reduce your debt load Consultation with a lawyer could be beneficial. If you're at 50% or more, your debt load is high risk; consider seeking advice from an attorney.
Think of those guidelines as a general rule of thumb. "There is no set rule for credit," says David Nash who is a certified Financial Planner working at Magister Wealth in San Antonio, Texas. However, he adds "If your debt is increasing in proportion to your income, it means some tougher tradeoffs need to be considered."
The difference between good and bad debt
It's crucial to differentiate between the good from the bad, and the harmful. A mortgage with an annual percentage rate of 3.5 percent, for instance is a different consideration as a credit card with 20% APR.
What's a good loan?
If you have an interest rate that is fixed and low, as well as you take out the loan will be utilized to purchase something that appreciates in value, such as an investment property, a business or college education. It's also beneficial if the interest is tax-deductible like the majority of student and mortgage loan interest.
What's bad debt?
The loans are characterized by high or variable interest rates that are used to buy things that lose value or get used up. Examples include high-interest personal loans for purchases that are discretionary, such as vacations, auto loans stretching up to five years, or high-interest with increasing amount.
What's toxic debt?
No-credit-check and with APRs above 36%, loans so long you are paying more than what the item is worth or loans requiring collateral you can't afford to lose, such as your vehicle.
Bad debt has crushing interest costs and limits your savings, cash flow and the ability to borrow for goals like buying a home according to Erika Safran, a certified financial planner with Safran Wealth Advisors in New York City.
However, a mortgage with low interest that you can comfortably afford shouldn't keep you up at night.
Common warning signs of problem in the area of debt
Your debt balance is not going down despite regular payments.
You're living paycheck-to-paycheck without a dime at the at the end of the month.
There's no reason to contribute money into a retirement plan that's sponsored by your employer because you need the money.
It's impossible to create an at least $500 buffer against financial unexpected events.
You're using credit cards to make cash advances.
Are my other types of debt a problem?
The following guidelines give you an idea of how much is considered to be too much in these categories of debt and how to handle it if you're overloaded:
Housing
Guideline: When buying a house, keep your mortgage expenses to . This calculator will help you understand .
How to handle an overwhelming situation: Think about the possibility of downsizing your home and moving into a cheaper region. If you're refinancing or changing homes in your 40s or 50s, choose a , in order to have no mortgage by retirement.
Student loans
The rule of thumb is to not borrow more to complete your degree than the amount you anticipate earning in your first year in the workforce. If you expect a starting salary of $40,000, for instance, you should restrict your loans to $10,000 annually for a degree that is four years long. is a major regret for students loan recipients, as per NerdWallet's research.
How to handle an overflow: Look into your alternatives, including income-driven repayment programs and refinancing.
Car loans
The guideline is that experts say your auto expenses -- including -- must be included in your take-home pay. Car loans should be for at least four years, and ideally with 20% down. This way, you won't end up spending years owing more than the car's worth.
How to handle an overloaded vehicle: If you have an , consider or trading your car in for a less expensive one.
(image: https://greendayonline.com/wp-content/uploads/2016/12/065e16157780f9b36e815af6455f2aeb.png)Medical debt
Guideline: Medical debt is an exceptional circumstance because medical expenses are often beyond consumers are able to control. This kind of debt usually has no interest, but the amounts involved can be overwhelming.
How to deal with an overload: Try negotiating with the billing office to reduce the amount to be paid or arrange the most affordable plan for payment. on your own if possible, but you may need to investigate .
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