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What is an Acceptable Amount of Debt?

May 7th 2015 by
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Seems like a silly question, doesn’t it? No debt would be the obvious answer, but unfortunately that’s not a realistic goal for most people. A NerdWallet report states the average household credit card debt is over $15,000.

You hear all the time about how important it is to save money and reduce debt, so having a reasonable goal in mind would be helpful.

Debt-to-Income Ratio

Since each individual has their own unique life and situation, it all comes down to numbers. The best way to determine how financially stable you are is to calculate your debt-to-income ratio.

First, add up your monthly income, including any child support, alimony or any other sources of income. Next, add up all your monthly debt obligations. This will include major debt such as payments for mortgage or auto loans, as well as monthly bills for things like utilities. Divide the total debt by the total income and multiply that number by 100 to get your ratio.

36% or less is considered good. You’re in great shape and should be comfortable enough to save and invest your money.

37% to 42% is considered safe. Your debt doesn’t consume you, but you may only be saving a little. You may want to take steps to reduce your debt, such as transferring credit card balances to a low-interest card or taking out a loan for debt consolidation.

43% to 49% indicates trouble. You’re not saving anything and finding it more difficult to make ends meet. Consolidating your debt would be a smart move, as well as looking into ways you can earn extra cash to pay down your debt.

Over 50% means you need help. Don’t panic if you’re over 50%, a lot of people are in the same boat, but you should take steps to improve your situation. Speak to a financial counselor or talk to your creditors to learn your options.

Warning Signs of Too Much Debt

  • You spend more than you earn and rely on credit cards between paychecks. Credit card debt can easily spiral out of control with increasing your monthly payments and interest due.
  • You skip some bills in order to pay others.
  • You only make the minimum payment on your credit card bill.
  • You’ve maxed out or are close to maxing out your credit cards.
  • Some of your debt has been sent to collections agencies.

High Debt Dangers

  • Your credit score will be lower, which will make it harder for you to get credit in the future.
  • The stress of having a high financial burden can be taxing on your health.
  • You’ll start a cycle of debt that’s hard to escape from. As you get further behind, you rely more on your credit cards which increase your debt burden and things can quickly get out of your control.

Be proactive when it comes to managing your financial health: read our free Debt Management guide!

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