Debt may be a four-letter word, but it certainly has its place. A home mortgage, for example, is good debt, and so is a credit card with a reasonable rate and a manageable balance. Without the ability to borrow money to finance a home, most of us would be stuck renting, because who has hundreds of thousands of dollars for such a purchase?
However, debt does have a dark side. And it’s important to know when your use of credit is a good thing, as well as when it’s time to cut back and watch the bills more carefully.
The truth is, you already know the answer to that question without running any numbers. If making payments on time is difficult and causes you stress, if you’re charging necessities to a credit card because you have no other options, if your bills are what’s keeping you up at night, if you’re borrowing from Peter to pay Paul, well, then you know there’s a problem.
While a crisis can put even the most responsible consumer into this type of situation temporarily, when this pattern becomes a way of life, there’s reason for concern. Generally speaking, if less than 30% of your income is going to debt, you’re doing great. However, if 40% or more of what you earn is going to debt payments, something needs to change.
Figure out your number, also known as your debt-to-income ratio, by adding all your monthly debt payments together, and dividing it by your monthly income. Calculators on websites such as bankrate.com can do the math for you. (Or come in to the credit union and we’ll run the numbers for you.)