Credit card debt is a modern dilemma, and most of us use at least one personal credit line for everyday life. Borrowing money just to get through the month is not uncommon, but how much is too much? When does debt become scary, and how do you deal with it? Our experts at Resolvly LLC are here to help you sort it all out.
Determine Your Debt-to-Income Ratio
Creditors use your debt to income ratio (DTI) to determine how much risk you pose as a borrower. You can use this same math to see how well you manage your finances. To calculate your debt to income ratio, start with the following:
Add up your monthly minimum payments on your debts (excluding rent or mortgage). This list includes credit cards, auto loans, student loans, or any other loan or obligation that causes you to make regular monthly payments.
Divide that number by your gross monthly income (the amount of money you earn before taxes and other deductions).
For example, let’s say you have $300 in credit card payments and $1,200 in student loan payments each month. Combined, that comes out to $1,500 a month. If you make $4,000 a month before taxes, your debt to income ratio is 37.5%.
Here’s how to calculate your debt-to-income ratio:
Your credit cards’ minimum monthly payment + any other debt/loans = monthly payments
Your monthly payments divided by your gross monthly income = your total debt to income ratio
Your result will be in the form of a percentage. The lower this percentage, the lower an impact your credit card debt has on your borrowing power.
If your DTI is above 50%, your debt load is considered “high,” and you should consider taking action to reduce it before borrowing more money.
Differentiate Between Good and Bad Debt
If you’re paying interest on your debts, they cost you money. Not all types of debt are bad, though, and some can even be a good financial move if they help you build your credit score or invest in something that will eventually make you money — like buying a house.
A mortgage is generally viewed as “good debt” because the interest rates are reasonable, and your home, in most cases, will accrue value over time, making it a sound investment.
What Is Bad Debt?
Bad debt involves borrowing to purchase things that lose value over time. For example, a new vehicle will depreciate the moment you begin to drive it. When you finance a new car, you’re paying for the privilege of owning something that will be worth less money.
Knowing When Credit Card Debt Is Too Much
Using the math above, you can determine your DTI and determine how much your credit card debt impacts your borrowing power. Ultimately, it takes discretion to differentiate between good and bad debt.
What Is Resolvly?
At Resolvly, our comprehensive services provide real solutions for consumers. We can assist with an array of unsecured debt sources, including credit cards, private student loans, medical bills, business debt, and vehicle repossessions.
Our goal is to help you find relief from financial stress and get back on track to living a happy and healthy life. Resolvly is a Florida Bar-approved lawyer referral service that helps clients nationwide connect with consumer protection attorneys that specialize in debt resolution.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes