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Do You Have Too Much Debt?

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Is Your Debt Too Much Debt?

Add up certain types of debt. Compare the total to income to determine if you have a problem and how to proceed.

By NerdWallet. Follow NerdWallet on social media to stay informed about updates

Aug 5, 2021

Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years 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 for various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in journalism and mass communications in Iowa’s University of Iowa.

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Are you unsure if you are in excessive debt? Looking into your debt-to-income ratio can help answer your question. Take your monthly debt obligations (things like auto loans as well as housing and credit card debts) and divide by your gross monthly income. Debt loads in excess of 36 percent 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 stress or sleepless nights If so, it’s time to make a plan to consider or research .

Watch your debts dwindle

Sign up for an account and link your credit cards, loans and accounts to manage them all in one location.

Figure out your debt load

Utilize the calculator below to figure out the source of the problem. The calculator also gives suggestions for what you should do next.

Input all debts — such as credit card payments and medical bills — as well as your earnings into this calculator. Students loans and mortgages tend to be less problematic types of debt, therefore, set them aside for the moment.

Check your results for these types 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% to 42% , consider DIY techniques like

If the ratio is 43% to 50%, you should take steps to lower your debt burden; consulting a may be helpful. If it’s more than 50 the debt is high risk; consider consulting with an lawyer.

Think of those guidelines as a general guideline. «There is no single standard for debt,» says David Nash, a certified financial planner with Magister Wealth in San Antonio, Texas. He adds that «If your debt is increasing as a percentage of your income, it means some tougher tradeoffs need to be taken into consideration.»

Distinguish between good debt and bad debt

It is important to distinguish between the good, the bad, and the toxic. A mortgage that has APR of 3.5 percent, for instance, can be weighed differently as a credit card with an APR of 20.

What is good debt?

If you have an interest rate that is low and fixed it is also when you take out the loan can be used to purchase something that grows in value, like a house, business or a college education. It’s also a good idea if the interest is tax-deductible, as is the case with most mortgage and student loan interest.

What is bad debt?

Loans with higher or variable rates of interest which are used to purchase things that lose value or are consumed. For instance, high interest personal loans for discretionary purchases like vacations and auto loans lasting five years or longer or high-interest loans with growing balances.

What’s a toxic debt?

Credit-check-free and with APRs higher than 36%, loans so long you end up paying more than what the item is worth, or loans requiring collateral you can’t afford losing, like your car.

Bad debt has crushing cost of interest and can limit your cash flow, savings and ability to borrow for goals such as buying a home according to Erika Safran, a certified financial advisor working with Safran Wealth Advisors in New York City.

But a low-interest mortgage that can be comfortably financed will not keep you up all the night.

Common warning signs of problem debt

Your debt balance is not going down despite regular payments.

You’re living paycheck to paycheck without a dime at the close your month.

It’s not like you’re contributing an employer-sponsored retirement plan because you’re desperate for money.

It’s impossible to create an at least $500 buffer against financial unexpected events.

Credit cards are used for cash advances.

Are the other forms of debt a problem?

The following guidelines will give you an idea of how much is enough in these categories of debt and what to do if you’re in the middle:

Housing

Guidelines: When purchasing a house, you should limit your mortgage costs to . This calculator will help you understand .

How to deal with an overload: Look into the possibility of downsizing your home and moving into a lower-cost area. If you’re refinancing or changing houses in your 40s or 50s, consider a in order to have no mortgage at retirement.

Student loans

Guidelines: Don’t take out more to complete your degree than you expect to make during your first year of working. If you expect a starting salary of $40,000, as an example, limit your loans to $10,000 annually for a degree that is four years long. This is a frequent resentment among student loan recipients, as per NerdWallet’s research.

How to handle an overflow: Look into your , including income-driven repayment plans and refinancing.

Car loans

The guideline is that experts say your total auto costs including should stay of your take-home pay. Car loans should be for less than four years and ideally with an initial 20% down payment. So you don’t have to spend years with a balance that is greater than what the car is worth.

How to handle an overload: If you have an idea of swapping your car to a cheaper one.

Medical debt

Guidelines: Medical debt is an exceptional circumstance because medical expenses are typically out of the consumer in their control. The type of debt that is referred to as medical debt usually has no interest, but the amounts involved could be too large to manage.

How to handle an overload You can try bargaining with the billing office to lower the amount due or set up an acceptable payment schedule. If you can, do it yourself However, you might have to look into .

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