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Are You In Too Much Debt?
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Are You In Too Many Debts?
Add up certain types of debt and compare the total to income to see if it's an issue and how to proceed.
By Our Nerdwallet contributors are specialists in their fields, who come from various backgrounds including finance, journalism and consulting. The By Our Nerdwallet team adheres to most stringent editorial standards to ensure our readers have the knowledge needed to make sound financial decisions with confidence. Learn more about our
Updated August 5, 2021 at 11:28AM PDT
Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years working at 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 various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in journalism and mass communications from Iowa's University of Iowa.
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Wondering if you have too much debt? Looking into your debt-to-income ratio can help answer your question. Take your monthly debt obligations (things like auto loans mortgage payments, home loans and credit card balances) and divide it by your gross monthly income. Debt loads in excess of 36% of your DTI can be difficult to pay back and hinder your ability to obtain credit.
If you can't keep up with your bills, or you're facing stress or sleepless nights, then it's likely time to make a plan to look into .
Watch your debts dwindle
Create an account and link your cards, loans and accounts to manage them all in one place.
Figure out your debt load
Use the calculator below to figure out if there is a problem. The calculator also gives suggestions on what to do next.
Enter various debts -- like credit card charges as well as medical bills and your income to this tool. The student loans and mortgages are generally less problematic forms of debt, so put them aside for the moment.
Take a look at your score for these riskier types of debt in terms possible solutions:
If it's lower than 36%, your debt load is considered affordable compared with your earnings.
If it's 36% to 42% , look into DIY techniques like
If the ratio is 43% and 50%, you should take steps to reduce your debt load; consulting a may be helpful. If you're at 50% or more your debt load is high risk; consider seeking advice from an attorney.
Consider these guidelines as a general rule of thumb. "There is no set rule for debt," says David Nash, a certified Financial Planner at Magister Wealth in San Antonio, Texas. He adds that "If your debt level is increasing as a percentage of your income, it means certain tradeoffs that are more difficult to negotiate need to be taken into consideration."
The difference between bad and good debt
It's crucial to differentiate between the good from the bad, and the harmful. A mortgage that has annual rates of 3.5 percent, for instance could be considered differently when compared to a credit card that has a 20% APR.
What's a good loan?
If you have an interest rate that is fixed and low and you take out the loan will be utilized to purchase something that grows in value, like the purchase of a home, business, or a college education. It's also beneficial if the interest is tax-deductible, like most mortgage and student loan interest.
What's bad debt?
These loans have high or variable interest rates which are used to purchase items that decrease in value or get consumed. Some examples include personal loans for purchases that are discretionary, such as holidays and auto loans lasting up to five years or loans that pay high-interest and have growing amounts.
What's toxic debt?
No-credit-check and with APRs above 36%, loans so long you end up paying more than what the item is worth or loans requiring collateral you can't afford to lose, like your vehicle.
A bad credit score can result in hefty interest costs and limits your savings, cash flow and ability to borrow for goals like buying a home According to Erika Safran who is a certified financial planner working with Safran Wealth Advisors in New York City.
A low-interest mortgage you are able to afford should not keep you up at night.
Common warning signs that indicate troublesome credit
Your balance of debt isn't declining despite regular payments.
You're living paycheck to paycheck and have no cash at the end of the month.
You're not contributing to an employer-sponsored retirement plan because you need the money.
You're unable to build an minimum of $500 to safeguard against financial fluctuations.
Credit cards are used for cash advances.
Are the other forms of debt an issue?
The following guidelines give you an idea of how much is considered to be too much in these categories of debt and what to do in the event that you're burdened:
Housing
Guideline: When buying a house, keep your mortgage costs to . This calculator helps you see .
How to handle an overwhelming situation: Think about , or consider downsizing or moving to a lower-cost location. If you're refinancing or switching homes in your 40s or 50s, consider a so you can be mortgage-free by retirement.
Student loans
Guideline: Don't borrow more for your education than you expect to make during your first year of the workforce. If you are expecting a start-up salary of $40,000, for example, restrict your loans to $10,000 per year for a four-year degree. This is a frequent resentment among student loan recipients, according to NerdWallet's research.
How to handle the stress: Consider your options alternatives, including income-driven repayment programs and refinancing.
Car loans
Guideline: Experts say your total auto costs -- including -- should be borne out of your home pay. Car loans are required to be four years or fewer and should be coupled with 20% down. So you don't have to spend years owing more than the car's worth.
How to handle an overloaded vehicle: If you have an idea of swapping your car for a less expensive one.
Medical debt
The guideline is that medical debt is a special circumstance because medical costs are usually beyond the consumers in their control. The type of debt that is referred to as medical debt usually has no interest however the amount can be overwhelming.
How to deal with an overcharge: Try negotiating with the billing office to reduce the amount due or set up the most affordable plan for payment. You can do this on your own, if you are able however, you might need to investigate .
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