3 Ways to Tell If You Have Too Much Debt

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You know you have a debt problem when you dread getting the mail for fear that there will be another giant bill that you can’t afford. Being in severe debt is kind of like being in quicksand — you can try and escape, but the moment you gain a bit of leverage, it feels as though you start sinking once again.

So how do we avoid this debt problem? Well, we’re supposed to take on some debt. Financial professionals tell us that we need revolving credit (like credit cards) and installment credit (like auto loans) to prove financial responsibility and maintain a good credit profile. So we can’t take on no debt at all.

How much debt should we have, then? How much is too much?

There is not exactly a set dollar figure that lets us know how much credit and debt we should take on. It would be nice if there were some sort of universal number, like $5,000 (worth of credit card debt), that we should not go over (or could not go over).

Because the “ideal” amount of debt we should have is based not on a universal dollar amount but on our individual situations, this makes it more difficult to tell whether or not we’re on the right track.

We’ve created a list of ways to determine whether you’re carrying too much debt. Are you?

Source: iStock

1. Compare your debt to the average

According to Experian’s 2014 State of Credit Report, the average consumer debt is $28,496. It went up slightly (by 2.3%) from the previous year. The average American has 2.18 bank credit cards and 1.54 retail credit cards.

Total debt Average credit card balance
Vantage credit score
Millennials (ages 18 to 29) $23,332 $2,682 628
Generation X (ages 30 to 46) $30,039 $5,343 653
Baby boomers (ages 47 to 65) $29,317 $5,347 700
The Greatest Generation (older than 66) $23,245 $3,044 735
Source: Experian (2013 statistics)

The total debt included in the chart above considers auto loans, student loans, credit cards, and any personal loans. It does not include mortgage debt. How does your non-mortgage debt compare to your age group’s average?

What about your credit card balances? Are your combined balances on your card significantly greater than those of your peers?

Graphic: Erika Rawes

2. Evaluate your debt-to-income ratio

Your debt-to-income ratio is the quotient of your debts divided by your income. You calculate it on a monthly basis, adding up all of your monthly debt obligations and then dividing that figure by your gross monthly income.

Financial professionals generally recommend a front-end ratio of 28% and a back-end ratio of 36%. The front-end ratio is just your housing payment, and the back-end ratio includes all of your expenses: your mortgage, HOA, car payment, any student loans, the whole enchilada. This means that a person with a gross monthly income of $5,000 should have no more than $1,800 worth of these monthly obligations.

However, according to the Consumer Financial Protection Bureau, the highest debt-to-income a borrower can have and still qualify for a mortgage is generally 43%.

Graphic: Erika Rawes / Data source: Federal Reserve September 2014 bulletin

3. Compare your net worth to your peers

Net worth is another good indicator of debt load. You calculate it by adding up all of your assets and then subtracting all of your debts. If your net worth is negative, that’s a pretty solid indicator that you may just have too much debt.

Take a look at the chart above; it shows the median net worth by age. Is your net worth lower than that of your peers? That could be a sign that you have too much debt, too little in the form of assets, or both.

If you are in too much debt, you’re certainly not alone. Bankrate recently released its financial security index charts for February. The charts revealed that roughly one in four Americans (24%) actually have more debt than they do emergency savings.

The debt situation is improving, but it still has a long way to go. Roughly three in 10 (29%) Americans said they feel more comfortable with the amount of debt they have today compared to this time last year, while 28% of respondents said their net worth increased over the past year.

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