Debt is a dark topic for a lot of people. Understanding debt is a personal thing, as debt is different for each person. Knowing how much debt is alright to call your own means understanding what your debt is made of.
Mortgages and auto loans are what we called secured debt, as these types of debt use collateral to protect the lender. There are also students loans and credit cards, which we refer to as unsecured debt. Unsecured debt doesn’t have any collateral and is only backed by the promise that the borrower gives to the lender.
To help you figure out how much debt is too much for you, you need to look at your debt-to-income ratio.
How Much Debt Can You Afford To Have?
Understanding the amount of debt that you can comfortably have comes from figuring out your debt-to-income ratio. You could make $1,000 a week or $10,000 week, though that information is irrelevant when it comes to the standard debt-to-income ratio used by lenders.
The math here is fairly simple:
Recurring monthly debt / gross monthly income – debt-to-income ratio. Your debt-to-income ratio comes in the form of a percentage. Your goal should be to have this ratio below 35% at all times.
Recurring monthly debt is debt that you must pay every single month, including rent, mortgage, credit card bills, car payments, student loans, etc.
Your gross monthly income is the amount of pre-tax income that you make each month. Let’s say that with your mortgage, car payments, and student loans, you pay $3,000 per month on recurring debt. Your gross monthly income in this scenario is $6,000.
When we plug those numbers into the formula, we get a debt-to-income ratio that is 50%. Yes, you might be thinking, “that doesn’t sound good.” You’re absolutely right.
Getting a mortgage is incredibly difficult if you have a DTI that is greater than 43%. The acceptable DTI for most lenders is 36%.
Warning Signs That You’re Carrying Too Much Debt
Here are some red flags that you might be carrying a bit too much debt.
It is up to you to keep track of your spending and your debt to make sure you are financially stable. Once you get your debt sorted, you might consider trying to increase your credit score as your next goal. Get in touch with us here at Personal Tradelines to see how we can help you take the next steps towards your financial goals.