The debt-to-income ratio is your monthly debt obligations compared to your monthly gross income (before tax), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio greater than 43% is considered excessive debt. Many financial advisors say that a DTI greater than 35% means you have too much debt.
Others push the limits to the 36% to 49% mark. The truth is, while DTI is a useful formula, there is no single indicator that debt will ruin your financial health. If your debt payments are higher than your income, it's a sure sign that you have too much debt. Not having enough money for your monthly payments means you skip payments from time to time, which makes your debt problems worse.
Paying late causes payment delays and higher interest rates. Experts say you need to target high-interest debt first; then low-interest non-deductible debt; and tax-deductible debt Bad debts have overwhelming interest costs and limit your cash flow, savings and ability to borrow for goals such as buying a home, says Erika Safran, certified financial planner with Safran Wealth Advisors in New York City. Having more income freed from debt can mean greater financial confidence, morale, and better opportunities to save for the future. If you can't keep up with payments, or if you're facing stress or sleepless nights, it's probably time to make a plan to pay off your debt or seek debt relief.
Another sign of having too much debt is if your credit score starts to decline and you end up being seen as a high-risk borrower by banks and other lenders, or someone less likely to make loan payments on time or repay loans in full, adds Joseph Polakovic, owner and CEO of Castle West Financial. For some, being buried in debt and having to dig their way out is enough to pay them off, accumulating more debts in the future. Between the warning signs and the debt-to-income ratio, I hope you find an answer to the question of how much debt is too much debt for you. This means having to repay the loan plus the new credit card charges, leading people to borrow more needlessly.
Your recurring monthly debt is things you must pay each month, such as your mortgage (or rent), car payment, credit cards, student loans, and any other loan bill that matures every month. Even if you can manage your payments, having too much debt can cause other financial problems, such as not being able to save money, losing bill payments, and having to borrow more money just to stay afloat. Then subtract from that number what you owe on your mortgage and credit card debt, student loans, or money you borrowed to buy a car. On the other hand, debt negatively affects your credit rating, since 30% of that calculation is based on the amount of debt you have.
Crises and emergencies happen, and sometimes people can't afford emergency car repairs or medical expenses because their credit cards are depleted or most of their profits go toward debt repayment.