How Much Debt is Too Much
If you’re worried whether you have too much debt, ask yourself one question: Do you even want to know?
If the answer is no, that’s a pretty good sign you might be headed for trouble. The only comforting news is you are not alone.
A lot of Americans are spending more than they can afford, and you don’t have to be poor to be one of them. High-income earners can find their personal debt clocks spinning out of control just as fast as low-income earners if they don’t have a sound spending plan.
Average Household Debt
The average household credit card debt is $15,355. The average household auto loan debt is $ 26,530. The average college graduate in 2015 left school owing $35,000 in debt for student loans.
Whether you’re above or below those averages, a little math and some friendly advice can help determine if you have too much debt. It’s called debt-to-income ratio and it compares an individual’s debt payment to his or her overall income.
Your Debt-to-Income Ratio
You should calculate your debt-to-income ratio to see what percentage of your paycheck is spent on mortgages (or rent), credit card bills, loans and other debt. If it’s above 43 percent, you’re not likely to get a mortgage or qualify for any loans at favorable terms.
A debt-to-income ratio below 43 percent hardly means you’re on solid financial footing. Lenders typically say the ideal ratio is 36 percent, but you need to remember they have a vested interest.
Car dealers, mortgage brokers and credit card companies want you to use their products. So just because you qualify for a loan doesn’t mean you won’t fall through a trapdoor and into a debt hole. Many financial experts say a debt ratio higher than 20 percent means you need to reduce your debt.
The bottom line is that debt-to-income ratio is a good tool, but there is no “one-size-fits-all” indicator that definitively indicates you might be headed for bankruptcy.
Signs of Too Much Debt
There are some warning signs of trouble beyond wanting to cover your eyes and ears when the topic even comes up:
- Paying off one credit card or other unsecured debt with another credit card is a five-alarm warning.
- Making only the minimum monthly payments on credit cards, or missing payments entirely.
- Not having an emergency fund. Financial advisors recommend you have enough to cover three to six months of expenses. The majority of people barely have three to six days. Only 58 percent of Americans have at least $500 in a savings account.
- Using credit cards to pay for necessities like groceries and gas, with no plan to quickly pay off the balance.
- Seeing your credit score slip.
- Bouncing checks and overdrawing your account.
- Hitting up friends and relatives for loans.
- Reaching the limit of your credit cards.
- Getting calls from debt collectors.
- Searching for a debt consolidation program.
- Losing sleep over how you’ll make ends meet.
- And perhaps the most obvious warning sign of all: Having your phone, water or electricity shut off.
- Being turned down for debt consolidation because of high debt-to-income ratio.
As you sit in the dark, there will be no more wondering whether you have too much debt. Your clock has already struck midnight.
Average Debt Statistics In America
- Consumer Debt In Florida
- Consumer Debt In Texas
- Consumer Debt In California
- Consumer Debt In New York
El Issa, E. ND, 2015 American Household Credit Card Debt Study. Retrieved from http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/(2015, September 29) Debt-to-Income Ratios. Retrieved from https://www.fanniemae.com/content/guide/selling/b3/6/02.html
Bright, Thomas. (2014, May 20) What is a good debt-to-income ratio, anyway? Retrieved from http://www.clearpointcreditcounselingsolutions.org/what-is-a-good-debt-to-income-ratio-anyway
ND. Household Credit. Retrieved from https://www.newyorkfed.org/regional/householdcredit.html
Wiles, Russ. (2014, August 17) 7 warning signs you’re heading toward bankruptcy. Retrieved from http://www.azcentral.com/story/money/business/2014/08/04/7-warning-signs-youre-heading-toward-bankruptcy/13583821/
(2013, December 30) What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important? Retrieved from http://www.consumerfinance.gov/askcfpb/1791/what-debt-income-ratio-why-43-debt-income-ratio-important.html