If you are struggling with your debts, you are not alone. According to information released by LendingTree, four out of five Americans were in the red in 2017 and one-quarter of them didn’t have a plan to pay what they owe. But how do you know if you have too much debt? Being aware of how much of your income you're using to pay debts is the first step.
If you spend more than 50 percent of your check paying off debts, this can be an indicator that you have a lot of debt.
Debt Income Ratio
The debt-to-income ratio is how much of your overall income is used to pay debts. Being aware of your ratio helps you improve the overall management of your finances. To calculate the ratio, you have to put together all fixed debts such as rent or mortgage, credit cards, student loans, insurance and other bills you might have.
This information is also analyzed by creditors when they are deciding whether to lend you money. According to Nerdwallet, the ideal ratio is under 15 percent, but up to 49 percent is considered acceptable. If you spend more than 50 percent paying debts, they advise you should get help from a financial specialist.
When used correctly, a credit card can help build a good credit score which enables you to get a mortgage or other loans. However, many people are drowning in credit card debt. The NerdWallet’s 2017 American Household Credit Card Debt Study, reported that Americans have $13.15 trillion in total debt and the average household carries credit card debt of approximately $16,000.
According to Greg McBride, the chief financial analyst at Bankrate, using 30 percent of your credit limit is considered neutral, and if you are utilizing more than that, it lowers your credit score.
According to Student Loan Statistic, the average debt for students who graduated in 2017 is almost $40.000. Currently, 44 million Americans have a total student loan debt of $1.48 trillion.
The research shows that 30 percent stop paying the loan five years after they graduate. If you can’t afford to pay it back, it may be possible to arrange a more affordable repayment plan – the conditions will depend on if it was a loan from a private company or the government.
Housing - Mortgage and Renting
According to federal guidelines, using more than 30 percent of your income for housing – rent or mortgage – can compromise basic needs like clothing, food or medical care. However, the “State Of The Nation’s Housing 2017”, released by Harvard, shows that 38 million Americans have crossed that line to pay for their homes.
- Harvard: The State Of Nation's House
- Student Loan Hero: Do You Know What Your Debt-to-Income Ratio Is? You Should.
- NerdWallet: 2017 American Household Credit Card Debt Study
- Debt: How to Recognize a Credit Card Debt Problem
- Forbes: Struggling To Repay Your Student Loans? You're Not Alone
- CNBC: You may be paying off your credit card bill wrong—here's the best way
- Student Loan Hero: A Look at the Shocking Student Loan Debt Statistics for 2018
- How to Calculate Total Debt Ratio
- Understanding Debt Management Ratios
- Does Income Affect Your Mortgage Rate?
- What Is the Minimum Income for a Mortgage?
- The Difference Between Disposable & Discretionary Income
- Does Paying Off a Mortgage Early Help Your Credit Score?
- The Concept of Debt
- How do I Calculate Mortgage & Income Ratio?