There are many types of debt. Depending on perspective, you may be totally okay with carrying some debt. Or you might be hesitant to take on any debt. So when is debt normal? And how much is too much?
When Is Debt Normal- And How Much Debt Is Okay?
“Normal” is relative. While there are a few general financial guidelines most people adhere to, there is also a lot of grey area. Take the following information into account as you evaluate your own financial past, present and future regarding consumer debt.
Is Debt Normal?
Yes, debt is very normal. Sometimes, it’s helpful to take on some debt to move forward in life. For example, taking on a reasonable mortgage or going to school to advance your career can be seen as normal or good debt.
Even though debt is normal, that doesn’t mean it’s the right choice or the right amount of debt for your situation. Some financial experts would argue that no debt is normal. Debt does mean that you are living beyond your means. They emphasize saving and planning before borrowing money. It’s the only way to totally prevent someday possibly drowning in debt.
However, as long as you remain in good standing, most would agree that some debt is reasonable and “normal.”
How Much Debt Is Okay?
To answer this question, let’s take a look at debt-to-income ratio. This figure is used by creditors, lenders, and credit reporting agencies as part of the formula to determine your creditworthiness. Someone with a high debt-to-income ratio may be seen as a high risk, and may have trouble obtaining credit or a loan. If they do get approved, the terms may not be as favorable as someone with a lower ratio. A good ratio is 20-30% or lower.
Add up all of your monthly debt payments (mortgage, rent, credit cards, loans, car payments, etc.). Then divide by your monthly gross income (that is your income before taxes are taken out).
Generally speaking, the more debt you have, the less stable your finances are. Debt can cause a lot of disruption in life once you accept it. The immediate help borrowing money provides may not outweigh the risk and cost. Sudden illness or job loss could prevent repayment and bring about bankruptcy, immense stress and strain on your personal relationships.
So is debt normal? Yes. The key is to remember that debt should be considered carefully and handled responsibly because it has far-reaching consequences. Do your best to live within your means and take calculated risks with your finances.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.