Is your debt affordable?
Comparing your debt load with your gross income can be a helpful tool for seeing if it’s manageable or becoming too large to tackle on your own. Leaving aside mortgages and student loans, since they’re generally more manageable forms of debt, here are some guidelines to consider:
DEBT LOAD UP TO 15% OF INCOME: This amount is likely affordable but is worth addressing.
If you’re carrying a moderate credit card balance, for example, paying it off can free up cash and save on interest.
DEBT LOAD FROM 16% TO 39% OF INCOME: Debts in this range get increasingly difficult to pay off. You may be able to make them more affordable by reducing interest or payments, such as with a balance transfer credit card or a personal loan. If you can’t qualify for one of those, you could explore a debt management plan with a nonprofit credit counselor.
DEBT LOAD OF 40% OR MORE OF INCOME: Debt loads this high can be insurmountable. Use the free consultations
offered by many nonprofit credit counselors and bankruptcy attorneys to see if debt relief might be right for you.
BOTTOM LINE: Know how your debt compares with your income and use that perspective to understand which approach is the most logical.
How is your debt affecting your life?
Think about how debt is impacting your life overall, says Thomas Nitzsche, media manager at nonprofit credit counseling agency Money Management International.
“If your debt is something that is hanging over your head and you’re worrying about it constantly, that’s something you should address,” he
says. Any debt that affects your mental health or significantly diminishes your quality of life is a bad debt.
Nitzsche advises taking an honest look at your situation and making a plan to resolve debt through a payoff approach like debt snowball — focusing on your smallest debts first — or by seeking debt relief. “Realize how uncomfortable you are with your debt and that it’s in your power to make changes.”
BOTTOM LINE: Debt doesn’t have to rule your life. If you’re feeling overwhelmed, take the first steps to resolve your obligations. This column was provided to The Associated Press by the personal finance website NerdWallet. Sean Pyles is a writer at NerdWallet. Email: spyles@ nerdwallet.com. Twitter: @seanpyles.