Most of us are living with debt, but how much is too much? It is obvious that the less debt a person has, the better. With only a small amount of debt, a person is able to use any extra money for savings, a retirement account, or unforeseeable emergencies. Still, some debt is inevitable if you want to purchase a home or vehicle. It is likely you do not have the money to pay for these types of purchases in full. Too much debt stems from any extra debt you might choose to take on. Taking out student or personal loans can put you into even further debt, and can take decades to pay back. If you rack up the amount on your credit cards it will only add to the already overwhelming debt you might have. It can become one vicious cycle that you will want to avoid.
Determining what is too much debt
What might be considered too much debt will vary from person to person. The easiest way you can determine if you have too much debt is by calculating your debt-to-income ratio. This calculation is very simple. All you have to do is divide the total number you pay per month on all of your debts by the total income you bring in for the month. Make sure that you include all debts, which might include a mortgage payment or auto loan. So now that you have your debt-to-income percentage, what might be too much debt? Generally speaking, you will want to have a debt-to-income that is less than 36 percent, which includes your monthly mortgage payment.
Why debt-to-income ratio is important
Even though your credit score plays an important factor in getting approval for important loans, such as a home mortgage, your debt-to-income ratio is just as important. This is because lenders look at both credit score and debt-to-income ratio to decide if you are likely to default or pay on time. The most important thing to lenders is that you are able to make your payments in a timely fashion.
Too much debt? Start lowering
If you find that your debt-to-income ratio is much too high, and lenders might not provide you the loan you need, then it might be time to focus your financial efforts on lowering your debt. Make a list of your debts and what you pay each month. Can you pay back something in full to avoid added interest rates? If so, do it. Use any extra money you have to pay back your debts and you will be well on your way to lowering your debt-to-income ratio.
Do you really have too much debt? This is ultimately for you to decide, with the help of your debt-to-income ratio. If you have a mortgage, auto loan, and other debts then you might feel like you do not have too much debt because you might not need to work with lenders in the near future. However, if you are working to make a big purchase which requires the help of a lender, and you have a high debt-to-income ratio, then you might find yourself with too much debt.