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How Much Is Too Much Debt?

by Isabella Craig on 2013/05/25

How much debt is too much debt? How much debt is too much debt?If you have any kind of debt, you are no doubt among the majority of people all over the world. Almost everyone today has some kind of debt – mortgages, student loans, auto loans or credit card debts.

If you have been paying off your debts in time, you should not have a problem. However, some people do end up owing more than they can repay.

Too much debt can cause a very unhealthy life. You are always worrying about the bills to be paid and it can be frustrating. If you have missed some payments, like so many people I know do, you may start wondering if you are in too much debt. So how do you really find out how much is too much debt?

Do You Really Have Too Much Debt?

The easiest way to answer this question is to sit down and crunch some numbers. This exercise may be tedious, but it is necessary. Start off with figuring out your income. Consider your pay and dividends from any investments you may have made. Also consider your savings and interests you may get from them.

This constitutes your monthly income. Now, in a separate column, write down all the debt you owe. Tally the final numbers and compare their ratios. Now that you have the numbers face to face, what do you see? If your debt is exceeding your monthly income, you probably have too much debt.

Ordinarily, your debt should be at least two thirds of your income. You will need a minimum of one third of your income to sustain yourself through the month. This one third should take care of your food and other living expenses.

How to Calculate Debt Overload

Your debt to income ratio is calculated simply by adding up your total debt – you can consider only the bad debt such as the amount you owe on your credit card and loans that need to be paid off monthly. Divide this number by your total monthly income. Now multiply this number by 100 and you have a percentage. This is roughly your debt overload.

Whatever number you are seeing here, is the percentage of your income that you spend on repaying your debts. If this percentage is any more than 75%, you are in too much debt. You will find yourself cutting corners and perhaps even foregoing important necessities.

Understanding the Mechanics of Debt
You may keep borrowing money to pay for the things you feel you need. However, you have to understand that this money is still owed and you have to return it. Finance pundits say, a debt ratio of more than 10% means you are in very bad debt but there are people who end up owing more than they earn. This is certainly a disaster in the making.

Therefore, before you decide to take another loan, make sure you have evaluated your debt. If you find out, you have too much bad debt, you will have to immediately start thinking about putting together a plan to lower it or pay it off. Alternately, you can also start thinking of getting more sources of income.

If you are looking for a way to rebuild your credit with credit cards, then you should get a secured credit card. However, if you just want to control your spending and budget, apply for a prepaid debit card.

How much debt do you have, and what steps have you taken to reduce it?

Courtesy of CreditCardShoppe.com

Read more on Reducing Credit Card Debt here.