We all have debt; it is an unfortunate fact of life. And since the COVID-19 pandemic, many of us have racked up even more debt than usual. Have you ever wondered just how much monthly debt is too much?
Of course, in an ideal world, the healthiest amount of monthly debt, particularly credit card debt, is NONE. But who among us lives in an ideal world!
There are several ways to see if your debt is toxic. Suppose you wanted to buy a home. Most mortgage lenders consider you a good bet for approval at a good rate if your mortgage payment alone will be no more than 28% of your total monthly income and that your total monthly debt – including your mortgage payment – be no more than 36% of your total monthly income. Lenders often refer to this as the 28/36 Rule. So, if you earn $50,000 per year and follow the 28/36 rule, your housing expenses should not exceed $14,000 annually or about $1,167 per month. Your other personal debt payments should not exceed $4,000 annually or $333 per month.
Remember that lenders base these debt-to-income ratios on your gross, not your net, monthly income. What you actually take home each month is probably at least 25% less after taxes – and that has to figure into how much debt you can really afford.
Other Ways to See if Your Debt is Too High
According to the Federal Reserve, if you have debt over 40% of your total monthly income, you are in danger of being in “financial distress.”
Another way to figure out if you have too much monthly debt is to apply the 50/30/20 Rule of budgeting. You must pay monthly expenses – your housing costs, food, utilities, debt payments, etc. – should NEVER exceed 50% of your monthly income. If you “must pay” expenses are under 50%, you are in good financial shape. That will leave you 30% for things you want but do not really need, like dining out, etc., and still an extra 20% to save, put toward additional debt payment, or have available for a sudden emergency like an unexpected medical bill or car repair.
But if you are paying more than 50% in bills every month and if a good part of that is credit card bills, you are in way over your head, and you need to do something to try to buy down on that debt. You can tell if your credit card debt is too high if:
- You cannot make more than the minimum payment on any one card.
- It would take you more than a year to pay off the entire amount on the card.
- You are using one credit card to make the payments on another card.
- You are using credit cards often for essentials like gas and food or for paying your utility bills.
- Your total monthly credit card bills are more than your rent or mortgage payment.
If any of these sounds like you, you are dangerously close to falling off of the debt cliff. You may consider a debt consolidation loan, which can bring you back to safe ground and save you considerable money in interest over time.