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Is Your Debt Too Many Debts?

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Do You Have Too Much Debt?

Combine the various types of debt. Compare the total to income to see if it’s an issue and how to proceed.

By NerdWallet Follow NerdWallet on social media for updates

Aug 5 2021

Editor: Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years working at The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Her previous experience includes copy editing and news for many Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in mass communications and journalism in Iowa’s 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. Add up your monthly debt obligations (things such as auto loans, housing payments and credit card bills) and divide it by your gross monthly income. If your debt load is greater than 36% of your DTI can be difficult to pay back and make accessing credit more challenging.

If you can’t keep up with your bills, or you’re facing anxiety or insomnia If so, it’s the time to come up with a strategy to look into .

Watch your debts dwindle

Create an account and link your credit cards, loans and accounts to keep them all in one place.

Figure out your debt load

Use the calculator below to tease out the source of the problem. The calculator can also provide suggestions on what to do next.

Input various debts for example, credit card bills and medical bills — as well as your earnings to this tool. Student loans and mortgages are generally less problematic types of debt, so put those aside for now.

Check your results for these more risky types of debt in terms of possible solutions:

If it’s less than 36 percent, your debt burden is within the range considered reasonable based on your earnings.

If it’s between 36% and 42% , consider DIY methods like or

If your debt is between 43% to 50%, consider taking action to lessen the burden of debt; consulting a may be beneficial. If you’re at 50% or more the debt is high risk; consider consulting with an lawyer.

Think of those guidelines as a general principle. “There is no one guideline for dealing with the debt situation,” says David Nash who is a certified financial planner at Magister Wealth in San Antonio, Texas. But, he says “If your debt level is increasing as a percentage of your income, that indicates certain tradeoffs that are more difficult to negotiate need to be taken into consideration.”

Distinguish between bad debt and good 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%, for example is a different consideration when compared to a credit card that has a 20% APR.

What is good debt?

When the interest rate is fixed and low, it is also when the loan can be used to purchase something that increases in value, such as the purchase of a home, business, or college education. It’s also a good idea to know if the interest can be tax-deductible, as is the case with most student and mortgage loan interest.

What’s a bad loan?

The loans are characterized by higher or variable rates of interest that are used to buy items that are worthless or are consumed. Some examples include personal loans for purchases that are discretionary, such as vacations, auto loans stretching up to five years or high-interest loans with growing balances.

What’s toxic debt?

No-credit-check and with APRs above 36 percent, loans so long you pay more than the product is worth or loans that require collateral you cannot afford to lose, such as your car.

Bad debt has crushing interest costs and limits your savings, cash flow and the ability to borrow to fund goals such as buying a home According to Erika Safran who is a certified financial planner working with Safran Wealth Advisors in New York City.

However, a mortgage with low interest that you can comfortably afford shouldn’t keep you up at late at night.

Common warning signs of troublesome credit

Your balance of debt isn’t going down despite regular payments.

You’re living paycheck to paycheck, with no money at the at the end your month.

There’s no reason to contribute money into a retirement plan sponsored by your employer because you need the 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 an issue?

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

Housing

Guideline: When buying a home, limit your mortgage expenses to . This calculator helps you see .

How to handle an overload: Look into , or consider downsizing as well as moving to less expensive region. If you’re refinancing, or moving properties in your 40s and 50s, choose a , so you can be mortgage-free when you retire.

Student loans

Guidelines: Don’t take out more for a degree than the amount you anticipate earning during your first year of working. If you are expecting a start-up salary of $40,000, as an instance, make sure you limit the amount of loans to $10,000 per year for a four-year college degree. is a major regret for students loan recipients, according to NerdWallet research.

How to deal with an overflow: Look into your alternatives, including income-driven repayment programs and refinancing.

Car loans

Guidelines: Experts suggest that your total auto costs (including — must be included in your take-home pay. Car loans are required to be four years or fewer and should be with a 20% down payment. So you don’t have to spend years paying more than the value of your car.

How to handle an overload If you are experiencing an overload , consider or swapping your car to a cheaper one.

Medical debt

The guideline is that medical debt is a particular situation because health-related costs are usually beyond the consumers’ control. This type of debt is generally interest-free however the amount could be too large to manage.

How to deal with an overload If you are experiencing an overload, try to negotiate with the billing department to reduce the amount to be paid or arrange an acceptable payment schedule. You can do this on your own, if you are able However, you might have to investigate .

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