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Is Your Debt Too Much Debt?
Take the sum of certain kinds of debt. Compare the sum to your income to determine if there's an issue and how you can proceed.
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Last updated Aug 5, 2021 11:28AM PDT
Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in capacities such as chief of the copy desk and team leader for design and editing. Her previous experience included copy and news editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism in The University of Iowa.
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Are you concerned about having excessive debt? Looking into your debt-to-income ratio can help answer your question. Add your monthly obligations to pay (things like auto loans, housing payments and credit card debts) and divide it by your gross monthly income. A debt load that is higher than 36% of your DTI could be difficult to pay back and make it more difficult to access credit.
If you're struggling to keep up with payments, or you're facing unrest or stress If so, it's the time to come up with a strategy to consider or research .
Watch your debts dwindle
Register for an account to link your credit cards, loans and accounts to manage them all from one location.
Figure out your debt load
Utilize the calculator below to tease out whether is problematic. The calculator can also provide suggestions for what you should do next.
Enter all debts -- like credit card charges and medical bills as well as your earnings into this calculator. The student loans and mortgages tend to be less problematic forms of debt, so set those aside for now.
View your result for these more risky kinds of debt in terms of 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 it's between 43% to 50%, you should take steps to lower your debt burden; consulting a may be beneficial. If it's 50% or more your debt load is high risk; consider consulting with an attorney.
Consider these guidelines as general guidelines. "There is no single guideline for dealing with credit," says David Nash an accredited financial advisor with Magister Wealth in San Antonio, Texas. But, he says "If your debt is growing as a percentage of your earnings, it suggests that you need to make tougher choices in the tradeoffs to be considered."
Differentiate between good debt and bad debt
It's crucial to differentiate between the good from the bad and the toxic. A mortgage with an annual percentage rate of 3.5 percent, for instance, can be weighed differently as a credit card with a 20% APR.
What's good debt?
If it is low and fixed, it is also when it is fixed and low, the loan can be used to buy something that grows in value, such as an investment property, a business or a college education. It's also good to know if the interest can be tax-deductible, like most student and mortgage loan interest.
What's bad debt?
The loans are characterized by higher or variable rates of interest which are used to purchase items that are worthless or get consumed. Examples include high-interest personal loans to purchase items that are not essential, like holidays, auto loans lasting up to five years or loans that pay high-interest and have growing balances.
What is toxic debt?
No credit check and with APRs over 36 percent, loans so long you are paying more than the item is worth or loans requiring collateral you can't 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, says 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 cause you to stay up all 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 at the end your month.
It's not like you're contributing a retirement plan that's sponsored by your employer because you need the money.
You're unable to build an minimum of $500 to protect yourself from financial unexpected events.
You're using credit cards for cash advances.
Are the other forms of debt a problem?
The following guidelines will give you an idea of how much is too much in these debt categories , and how to handle it in the event that you're burdened:
Housing
Guideline: When buying a house, keep the mortgage cost to . This calculator can help you determine .
How to handle an overload: Look into alternatives to downsizing or moving to a less expensive location. If you're refinancing, or moving houses in your 40s or 50s, consider a so you can be mortgage-free when you retire.
Student loans
Guidelines: Don't take out more to complete your degree than the amount you anticipate earning during your first year of the workforce. If you are expecting a start-up income of $40,000 for instance, make sure you limit the amount of loans to $10,000 per year for a four-year college degree. This is a frequent resentment among student loan recipients, as per NerdWallet's research.
How to deal with the stress: Consider your options alternatives, including income-driven repayment programs and refinancing.
Car loans
Guidelines: Experts suggest that the total cost of your car -- including -- should be borne out of your home pay. Car loans should last for at least four years, and ideally coupled with 20% down. That way you don't spend years owing more than the car's worth.
How to handle an overloaded vehicle: If you have an idea of selling your vehicle to a cheaper one.
Medical debt
Guidelines: Medical debt is a special case since health care expenses are typically out of the consumer in their control. This kind of debt generally has no interest charges, but the amounts involved could make it difficult to manage.
How to handle an overload If you are experiencing an overload, try to negotiate with the billing department to reduce the amount due or create an affordable payment plan. If you can, do it yourself, but you may need to research .
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