There isn’t anything wrong with having debt if it can help you reach your personal or professional goals. For instance, taking out student loans may be the only way to pursue an advanced degree in your chosen field. However, it is important that you are able to keep your debt to a reasonable level. How can you tell if you have too much debt?
What Is Your Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) should be no more than 28 percent before factoring in a rent or mortgage payment. Ideally, it will be no more than 36 percent after accounting for a housing payment. This gives you the ability to create an emergency fund, save for retirement and otherwise have the financial flexibility needed to live comfortably. While you aren’t necessarily doomed if your DTI is higher than 36 percent, it may be a good idea to review your budget to see if you can make any adjustments. Talking to a company such as Truman Advisors may also help you get closer to an ideal debt level.
Are You Only Making Minimum Payments?
If you can’t afford to make more than the minimum payment on a credit card or other revolving account, it may be a sign that you have too much debt. You should strive to pay off your credit cards and similar accounts in full each month. At a minimum, you should make it a goal to make double the minimum payment before a billing cycle closes. That will help you avoid paying interest that could go toward your retirement or toward discretionary purchases.
Do You Go into Debt to Pay Your Debt?
It is not uncommon for people to use a credit card to make a credit card payment. While this will ensure that your credit score and history remain intact, it will do nothing to help you get out of debt. If you find yourself taking on new debt to pay off your current balances, it may be a good idea to speak with a financial professional such as those from Truman Advisors. A financial professional can provide insight into how debt consolidation or debt forgiveness programs can help you pay down balances faster.
Have You Thought About Filing for Bankruptcy?
A sure sign that you have too much debt is that you have found yourself looking into filing for bankruptcy. While bankruptcy can actually be a positive event for some people, it also has the potential to ruin your credit score. Furthermore, a bankruptcy can stay on your credit report for up to a decade if you file for a Chapter 7 liquidation bankruptcy. Other potential negative consequences of filing for bankruptcy include not being able to get a credit card or apply for a home loan for two or more years.
There are many ways in which having too much debt can impact the quality of your life. For instance, you may not be able to quit a job because you need the money to make minimum payments on a credit card or medical debt. This could lead to a significant amount of stress that may cause mental and physical health issues. Therefore, it is in your best interest to figure out a way to get out of debt in a timely manner.