How Much Debt Is Too Much Debt and Can Bankruptcy Help?
How Much Debt is too Much?
Almost every American has some type of debt. The average person has over $137,000 in debt. Personal loans, car loans, mortgages, and education loans cause Americans the most debt.
Owing money is not necessarily a bad thing. A college loan or a business loan, for example, eventually increases your earnings. But getting overwhelmed in debt can create a financial disaster. So, that leaves many wondering exactly how much debt is too much debt?
You know that you have too much debt when it interferes with other financial obligations and goals. If your debt is so high that saving money for emergencies, retirement, or fun isn't possible, it is time to reduce the amount of money you owe.
Do you often pay late fees because your bills are not paid on time? This is the number one sign that you have too much debt. But do not think all is well simply because you manage your bills. If nothing is left to save, you are spending too much of your income.
Experts recommend payments for consumer debt take no more than 20% of your take-home pay. Adding the mortgage payment increases this amount, but it is important that you aren’t spending more of your take-home pay on debt than necessary.
Mortgage lenders evaluate your debt-to-income ratio versus gross monthly income when considering applications. Applicants with a debt-to-income ratio exceeding 43% are over-extended, likely resulting in a mortgage denial.
Lenders also look at your credit score. Credit utilization is a primary factor in your approval. If you have used over 30% of your available credit, it lowers your credit score. This decreases odd of loan approval.
Some financial advisors say that any amount of debt is too much. You are paying interest fees on this money that never increase in value.
Is There Such Thing as Good Debt?
Some types of debt are good to have. A mortgage is a great example of good debt. Good debt is debt that invests in your future. So, a car loan isn’t good debt because it depreciates in value. A mortgage loan or a college loan, on the other hand, increases your income and success later.
Keep housing costs to 30% or less of your income. Your mortgage payment, insurance, and property taxes all should fit within this amount. If it does not, look for a more affordable home.
Keep Debt Low
Interest is a part of borrowing money. The more money you pay on interest, the less money for the things that really matter. Do our best to keep debt balance low. Stick to only ‘good debt’ when possible. You will be in a much better financial situation with only good debt than with a combination of both good and bad debt.
Consider a Savings Account
Open a savings account with an FDIC insured bank to enjoy guaranteed returns on your money. Online and in-person savings accounts are available. Choose one of our best online savings accounts picks to earn up to 20x the national average rate.
Do You Just Need Some Help?
If you have too much debt and need to make a change, bankruptcy may be an option for you. Brian Wood and Katy Brewer have decades of experience helping individuals find their way out of financial hardship. If you find yourself in the category of financial hardship, we invite you to contact us today for your free consultation!