Credit card debt is a modern dilemma, and most of us use at least one personal line of credit for everyday living. Borrowing money just to spend the month is not uncommon, but how much is too much? When does debt get scary and how do you deal with it? Our experts at Resolvly LLC are here to help you sort it all out.
Determine your debt to income ratio
Creditors use your debt-to-income ratio (DTI) to determine the level of risk you pose as a borrower. You can use these same calculations to see how well you manage your finances. To calculate your debt-to-income ratio, start with:
Add up your minimum monthly payments on your debts (excluding rent or mortgage). This list includes credit cards, car loans, student loans, or any other loan or obligation that requires you to make regular monthly payments.
Divide this number by your gross monthly income (the amount of money you earn before taxes and other deductions).
For example, let’s say you have $300 in credit card payments and $1,200 in student loan payments each month. Combined, that comes to $1,500 per month. If you earn $4,000 per month before taxes, your debt-to-income ratio is 37.5%.
Here’s how to calculate your debt ratio:
Minimum monthly payment from your credit cards + any other debt/loan = monthly payments
Your monthly payments divided by your gross monthly income = your total debt to income ratio
Your result will be in the form of a percentage. The lower this percentage, the lower the impact of your credit card debt on your borrowing capacity.
If your DTI is above 50%, your debt is considered “high” and you should consider taking steps to reduce it before borrowing more money.
Differentiate between good and bad debts
If you pay interest on your debts, they cost you money. However, not all types of debt are bad, and some may even be a good financial decision if they help you build your credit score or invest in something that will ultimately earn you money, such as debt. buying a house.
A mortgage is generally considered “good debt” because the interest rates are reasonable and in most cases your home will appreciate in value over time, making it a good investment.
What is a bad debt?
Bad debt is borrowing to buy things that lose value over time. For example, a new vehicle will depreciate the moment you start driving it. When you finance a new car, you are paying for the privilege of owning something that will be worth less.
Know when credit card debt is too high
Using the calculations above, you can determine your DTI and determine the impact of your credit card debt on your borrowing power. At the end of the day, discretion must be exercised in differentiating between good and bad debt.
What is Resolvly?
AT resolutely, our comprehensive services bring real solutions to consumers. We can help you with an array of sources of unsecured debt, including credit cards, private student loans, medical bills, business debt, and vehicle seizures.
Our goal is to help you find relief from financial stress and get you back on track to living a happy, healthy life. Resolvly is a Florida Bar-certified attorney referral service that helps clients nationwide connect with consumer protection attorneys who specialize in debt settlement.
This article does not necessarily reflect the views of the editors or management of EconoTimes