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While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Debt has been known to increase stress levels, wreck marriages and contribute to depression.
Unfortunately, debt is so common that sometimes people underestimate it. You want your debt to be as low as possible so you can remain financially flexible for both emergencies and your future goals. How much debt is a lot? Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments. The highest ratio you can have and still be able to obtain a qualified mortgage is also 43 percent. To calculate how much your debt is affecting your monthly finances , take your total monthly debt and divide it by your monthly income.
But the debt that it causes can lead to financial challenges, especially when you get overextended. Revolving debts, such as credit cards, can be particularly problematic because you have an open credit line that you can borrow against, as needed. That can be beneficial in a pinch when you have an unexpected expense or emergency. But it can also lead to problems with your budget that leave you living paycheque-to-paycheque.
This first measure can tell you when you have too much debt overall. A debt-to-income ratio DTI measures the amount of debt you have relative to your income.
You divide your total monthly debt payments by your gross monthly income and multiply by to get a percentage. They will see what your DTI is with the new loan payments factored in. That way, you can borrow as needed, if you need new financing. Credit card debt can get you overextended if you run up balances on multiple cards. The next two ratios can help you ensure you keep those debts under control. And if you get a long-term auto loan more than four years , your loan balance may wind up higher than what you could make from selling your car.
Put as much money down as you can when you buy and limit the loan term to four years or less. Read the fine print before you apply for a credit card. You may get an offer for a zero-percentage-rate card, but after 15 or 18 months, that rate could shoot sky high. Besides, credit card companies often charge a higher interest rate for cash advances than for purchases, plus a fee. This type of debt is generally interest-free, but the amounts involved can make it unmanageable.
How to handle an overload: Try negotiating with the billing office to lower the amount due or set up an affordable payment plan. Take steps to cover the costs on your own if possible, but you may need to look into debt relief. Watch your debts dwindle. Sign up for an account to link your cards, loans and accounts to manage them all in one place. Let's do this. Figure out your debt load. Distinguish between good debt and bad debt.
Common warning signs of problem debt. Are my other types of debt a problem?
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