At times, it seems as though you have the same amount of debt as most people you know. However, there are times when you struggle to make your payments, and you admit to even missing a payment or two. But really, do you have too much debt? Keep reading to see if you do, and if so, what you can do about it.
How Much Debt is Too Much?
One way to check is to assess your debt-to-income (DTI) ratio. Add up your regular monthly bills and divide the total by your monthly gross earnings. If your debt load is more than 36% of your DTI, you may have trouble clearing it, which can also make it difficult to secure more credit.
If your debt load is under 36%, the amount you owe is inside the range largely deemed affordable, when sized up against your income.
If your debt total is between 36% to 42%, you may want to consider do-it-yourself methods such as debt avalanche or debt snowball.
- Debt avalanche. Here, you can save money – and time – by first paying off debts with the highest interest rate, while making minimum payments on all your other obligations.
- Debt snowball. With this approach, you erase debts in order from smallest to largest, while making minimum payments on other debts. This method is recommended for those who are motivated by ever-increasing “wins.”
Now, if the amount you owe is between 43% and 50%, you may want to consider credit counseling. If it’s 50 percent or more, you have an acute situation that will require either debt settlement (also known as debt relief) or, as a last resort, bankruptcy.
The Good, Bad, and Ugly
Having said all that, all debts are not the same. There is such a thing as “good” debt –such as a loan for a house, college education, or business — if it carries a low and fixed interest rate. A bonus is interest that’s tax deductible.
On the other hand, bad debt includes loans with high or variable interest rates that go toward things that depreciate or get used up. We’re talking, for example, auto loans with terms of five years or longer; vacations; or credit card debt.
Also read: What is IRS Debt Forgiveness Programs?
Predatory loans, such as those “payday” offers, that have APRs above 36%, constitute particularly bad debt, as do loans that are tied to collateral that you cannot afford to lose, such as your vehicle.
In addition to debilitating interest costs, bad debts restrict your cash flow, drain your savings, and hamper your ability to borrow for goals such as purchasing a home. A low-interest mortgage that you can easily handle won’t have you tossing and turning at night. Neither will Achieve personal loans.
Red Flags that Portend Problem Debt
You’re likely look at financial difficulties if:
- Despite making regular payments, your debt balance isn’t decreasing
- You’re living paycheck to paycheck, with no money leftover at month’s end
- Your need for money keeps you from contributing to your employer-offered retirement plan
- You’re unable to establish an emergency fund of at least $500 to handle emergencies such as a car repair, veterinary bill, or unexpected trip out of town
- You’re getting cash advances from credit cards
Do you have too much debt? If you didn’t know your status before, you likely know now. If you can’t keep pace with payments, or are losing sleep or even your appetite, your problem may be too much for you to handle. For that, you may need debt settlement. We suggest Freedom Debt Relief, which has the credibility, reputation, and experience you need.