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A Little Debt vs. Too Much Debt

Amount of debt

Debt burdens are largely relative. What may be a lot of debt for one person isn’t a lot of debt for another. When it comes to having just a little debt vs. too much debt, your income and ability to repay the amount you owe make a big difference. If you feel that you’re struggling with payments or just can’t make ends meet each month, you might be dealing with too much debt. There are a few signs that suggest it might be time to seek out help.

Debt Compared to Income

Your income plays a big part in comparing a little debt vs. too much debt. If you owe $1,000 per month and bring home $2,000, your debt-to-income ratio is 50 percent. But if your debt is $1,000 and your income is $4,000 each month, then your debt-to-income ratio is 25 percent, which is much more manageable for most people.

Banks and lenders generally follow guidelines when comparing a potential borrower’s debt to income. A bank will usually avoid loaning money to someone who already has a significant debt-to-income ratio. According to the Consumer Financial Protection Bureau, 43 percent is the magic number for borrowing money for a home. If your debt-to-income ratio is above 43 percent, a lender might consider you too risky for a mortgage. A lower ratio, around 36 or 28 percent, is usually preferable, as it gives you and the lender some reassurance that you won’t be in over your head.

Minimum Payments Only

Along with comparing the amount you earn to the amount you owe, another way to see if your debt is becoming too much to bear is to look at what you can afford to pay each month. If you have credit card debt and have only been making minimum payments, but you’re continuing to use the card, your debt can spiral out of control very quickly. Interest builds up on the remaining balance and will accrue on any additional amounts you charge right away. Paying just the minimum due each month can mean that it will take years to pay off even a small credit card balance.

Nothing Left Over

Debt becomes a problem when it affects the amount of money you actually have on hand. If it’s a struggle to make ends meet or if you’re living paycheck to paycheck, with no financial cushion in the form of a savings account or emergency fund, your debt might be a big part of the problem.

Making a budget will help you see where your money is going each month and allow you compare what you’re spending to what you actually earn. With a budget, you can begin to plan for ways to build up savings and trim your spending, so that your debt dwindles down.

Having too much debt can be a serious roadblock to your financial well-being. CESI is here to help. Our counselors have worked with hundreds of thousands of people, helping them create a plan to reduce and get out of debt. If you’re feeling overwhelmed by the amount of money you owe, help is available.

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