In recent years, many people have incurred dangerous levels of debt. In part, this is due to aggressive marketing on the part of creditors. You may have worked hard to build and maintain your credit. But especially if you have good credit, you may not be able to trust the creditor to tell you it’s time to quit incurring debt.
And too many people believe that “as long as I can make the payment, I can afford the purchase.”
But there are some easy tools you can use to check up on your situation. First is your debt-to-income ratio.
As a rule of thumb, your rent or mortgage payment should be no more than 25% of your income. This should include taxes and insurance. If both you and your spouse work include both incomes only if both are permanent and stable. In recent years, some mortgage lenders and real estate salespeople have suggested that this percentage could be raised to 35%, but that can be a recipe for disaster in today’s uncertain economy.
Credit card debt and auto financing can safely equal 10% of your annual income. While you *can* count bonuses and overtime as part of your income, it makes more sense to only count your base income and set aside additional income as “special” funds to take vacations, make home improvements, pay down debt or finance emergency savings funds.
While debt levels higher than these may be “normal” in today’s society, they are not safe. Most Americans are within two paychecks of serious financial trouble, especially as total debt levels approach 50% or more of income.
And no matter what society considers normal, or experts consider “safe”, if you don’t feel comfortable at your current level of debt, begin immediately to take proactive steps to reduce debt.
There are online debt planning calculators you can use to devise a payoff plan to reduce or eliminate debt. Most people choose to pay off high interest credit card and auto loans first; while others focus on building emergency savings or home equity.
You can also sign up for debt management plans, where a professional credit counselor will help you by devising a payment plan and working with creditors to reduce interest rates and penalties. You make one payment to the plan, and the plan administrator allocates it to creditors. As these services become more prevalent, quality varies widely. Before signing up for credit counseling research the company’s reputation.
You can get the credit monster under control and come out even better than “normal”.