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Are You In Too Much Debt?
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Do You Have Too Many Debts?
Combine the various types of debt, then compare the total to income to determine if you have an issue and how to proceed.
Through Our Nerdwallet contributors are experts in their fields, who come from various backgrounds including finance, journalism and consulting. Our editorial standards are the highest standards of editorial to ensure that our readers are provided with the information necessary to make financial decisions confidently. Learn more about our
Updated Aug 5, 2021 at 11:28 AM 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 working at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Her previous experience included news and copy editing for several Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in journalism and mass communications in The 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 obligations to pay (things like auto loans as well as housing and credit card bills) and divide by your gross monthly income. If your debt load is greater than 36 percent of your DTI is difficult to pay back and can hinder your ability to obtain credit.
If you're having trouble keeping up with your bills or you're experiencing stress or sleepless nights It's probably time to create 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 location.
Figure out your debt load
Utilize the calculator below to tease out whether is problematic. The calculator will also offer suggestions for what you should do next.
Enter various debts -- such as credit card payments as well as medical bills and your income to this tool. Student loans and mortgages are typically less troublesome forms of debt, so set these aside for now.
Check your results for these riskier types of debt with regard to possible solutions:
If it's less than 36%, your debt load is within the range considered affordable compared with your earnings.
If it's between 36% to 42% , you should look into DIY techniques like
If your debt is between 43% and 50%, consider taking action to lower your debt burden; consulting a may be helpful. If it's more than 50, your debt load is a high risk. Consider consulting with an lawyer.
Think of those guidelines as an overall rule of thumb. "There is no one standard for credit," says David Nash who is a certified financial planner working at Magister Wealth in San Antonio, Texas. He adds that "If your debt levels are increasing as a percentage of your income, it means certain tradeoffs that are more difficult to negotiate need to be considered."
Distinguish 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, can be weighed differently when compared to a credit card that has 20% APR.
What's good debt?
If you have an interest rate that is fixed and low, as well as you take out the loan is used to buy something that increases in value, such as a house, business or college education. It's also a good idea if the interest is tax-deductible like the majority of mortgage and student loan interest.
What's a bad loan?
These loans have rate of interest that are variable or high that are used to purchase items that decrease in value or are used up. Some examples include personal loans for discretionary purchases like holidays or auto loans stretching 5 years or more or loans that pay high-interest and have growing balances.
What's toxic debt?
No-credit-check and with APRs above 36 percent, loans so long you end up paying more than the product is worth, or loans with collateral you simply cannot afford to lose, such as your vehicle.
Bad debt has crushing rates of interest, and it can hamper your savings, cash flow and your ability to borrow to fund goals like buying a home According to Erika Safran, a certified financial planner with Safran Wealth Advisors in New York City.
A low-interest mortgage you can comfortably afford shouldn't make you sleepy at night.
Common warning signs of troublesome debt
The balance on your debt isn't declining despite regular payments.
You're living paycheck to paycheck, with no money at the end each month.
It's not like you're contributing an employer-sponsored retirement plan because you're desperate for money.
You're not able to put together a fund of at least $500 to protect yourself from financial fluctuations.
You're using credit cards for cash advances.
Are the other forms of debt a problem?
The following guidelines provide an idea of how much is too much in these debt categories and what to do in the event that you're burdened:
Housing
The guideline is: when buying a house, keep your mortgage costs to . This calculator will help you understand .
How to deal with the stress of an overflow: Consider , or consider downsizing and moving into a lower-cost region. If you're refinancing or changing homes in your 40s or 50s, choose a , so you can be mortgage-free when you retire.
Student loans
Guideline: Don't borrow more to complete your degree than the amount you anticipate earning during your first year of working. If you are expecting a start-up salary of $40,000, for instance, restrict your loans to $10,000 annually for a four-year college degree. is a major regret for student loan recipients, according to NerdWallet research.
How do you 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 less than four years and ideally with a 20% down payment. So you don't have to spend years with a balance that is greater than what the value of your car.
How to deal with an overload If you're experiencing an overload , consider or selling your vehicle to a cheaper one.
Medical debt
Guidelines: Medical debt is an exceptional situation because health-related expenses are often beyond consumers' control. This kind of debt generally has no interest charges however the amount can be overwhelming.
How to deal with an overload: Try bargaining with the billing office to reduce the amount to be paid or arrange an affordable payment plan. on your own if possible however, you might need to investigate .
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