Do I Have Too Much Debt?

Most people have some level of debt, which may include a combination of mortgages, student loans, personal loans and credit card bills. However, if you have too much it can lead to all sorts of issues

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When does some debt become too much debt?

The answer will vary from person to person, depending on how much an individual owes versus how much he or she can afford to pay.

Debt-to-Income Ratio

Your debt-to-income ratio, or simply your debt ratio, is the first tool to utilize to answer the question: "Do I have too much debt?" It indicates what portion of your income goes to monthly bill payments.

To determine your debt ratio, first add up all your monthly debt payments. Include payments toward credit card bills, auto loans, student loans and personal loans, but not your mortgage payment.

Then divide this number by your monthly income after taxes and other deductions, called your take-home income.

The resulting number should be 0.10 or lower, meaning your debts should use up 10 percent or less of your income.

Now repeat the calculation, this time including the mortgage payment in your monthly debt costs. Including mortgage, your debts should be 36 percent or less of your monthly take-home income.

If your non-mortgage payments are more than 10 percent of your take-home income and your total debt payments exceed 36 percent of that income, you probably have more debt than you can manage. Try cutting monthly expenses or look for ways to increase income.

Other Warning Signs of Too Much Debt

If you fear your debts are becoming too high, watch for additional warning signs.

You probably have too much debt if the following statements apply to you:

  • You're receiving calls from creditors trying to collect payments.
  • You're paying the minimum on monthly credit card bills. Even with a small debt, this approach can take years to pay off a balance and can cost you much more in interest than the original debts themselves.
  • Your credit cards are maxed out.
  • You've been turned down for new lines of credit. This means you already have too much debt or your recent credit history is damaged.
  • Your bank account balance is regularly at or below $0.
  • You have no emergency fund. It always is wise to have some money set aside in case of a financial emergency, such as a lost job or unexpected medical bills.
  • After paying your bills, you have no money to spend on basic extras, such as ordering food or seeing a movie.
  • You've taken advances on your paychecks.
  • You use one loan or credit card to pay off another loan or to pay regular bills. This approach only shifts your debt, whereas your goal should be to reduce your total amount of debt.
  • You pay bills late because you don't have enough money to cover them.

Typical Debt Amounts

You may want to find out how much debt is normal for people of your age who have similar income levels. These two factors significantly affect the average debt load.

Younger individuals may expect better jobs and higher salaries in the future. They also have more time to pay off loans and start saving for retirement.

Meanwhile, those with higher incomes have the resources to take on more debt.

For example, an individual in her 30s who earns more than $100,000 per year has an average debt load of $247,000. But someone in his 60s with an income below $50,000 typically has only $24,000 in debts, a tenth of the amount of the younger person.

If you have significantly more debt than your peers, this may be a sign that you've taken on more debt than you will be able to pay off.

If you find yourself with more debt than you can afford, you have options. Your situation may make you a good candidate for a debt management program, debt resolution, debt consolidation or even bankruptcy.

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