How much Debt is too Much

In 2010, total consumer debt in the United States totaled almost $2.4 trillion, or $7,800 for every person (not household) in the U.S. This figure does not include mortgages. About one-third of all consumer debt in 2010 consisted of revolving credit, which is the kind of credit you have with credit cards. The other two-thirds of consumer debt included car loans, student loans, and other types of non-mortgage loans. Approximately 181 million Americans had credit cards in 2010, and these Americans had, on average, almost nine credit cards each. In 2010, around one out of every 160 people filed for personal bankruptcy.

Personal Debt Levels

The amount of debt that is reasonable for you depends on your income and on interest rates. One way to measure whether your debt level is too high is to figure up your net worth. This is simply adding up all your assets (like your home, vehicles, bank accounts, etc.) and measuring that against your liabilities (mortgage debt, revolving debt, and other debts). If your net worth is positive, you have more assets than liabilities, and that's good. If your net worth is negative, it's a good bet that your debt level is higher than it should be.

Income and Debt

Your debt to income ratio is an important guideline that gives you an indication of whether you have too much debt. To calculate your debt to income ratio, first add up your monthly payment obligations, like:

• Mortgage payments
• Car payments
• Student loan payments
• Child support obligations
• Minimum credit card payments
• Other monthly required payments

Next, calculate your monthly income, including your salary, monthly dividends, and things like year-end bonuses divided by 12. The sum of these numbers is your monthly income. Then divide your monthly debt totals by monthly income. If you have total monthly obligations of $2,000 and a total monthly income of $5,000, your debt to income ratio is 2,000/5,000, or 40%. Lenders prefer that this number be 36% or less, so if your debt to income ratio is 40%, you probably have too much debt. Many websites have easy-to-use calculators you can use to determine your debt to income ratio.

Dangers of too much Debt

If you have too much debt, you could be in danger of:

• Not saving enough money for emergencies
• Coming up short on some payments and risking late fees and other penalties
• Being unable to buy the essentials like food without using credit cards
• Missing payments and damaging your credit rating

What to Do if your Debt Level is too High

If you recognize the signs of excess debt before it becomes totally unmanageable, you can often dig yourself out with a disciplined approach:

• Stop using your credit cards
• Pay more than the minimum required payments each month
• Cut out non-essentials like premium cable television and restaurant meals
• Consider taking a second job or working overtime when possible

Sometimes debt becomes burdensome enough that more drastic measures are required. Credit counseling, debt management plans, debt settlement plans, and even bankruptcy may be required if you have let your debt get out of control. You're always better off acting early to address debt problems, because they only worsen if ignored.

Sources:

http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/ http://www.smartmoney.com/personal-finance/debt/do-you-have-too-much-debt-14183/ http://financialplan.about.com/od/personalfinance/a/Debt-to-Income.htm http://money.msn.com/debt-management/debt-calculator.aspx