Borrowing money can be a useful financial and credit-building tool. It can allow us to attain financial goals, including going to college and buying a home or a car. It can also be very convenient and cost-effective to pay for various expenses on a low-interest rate credit card. But how much debt is too much debt?
Before you read this article, you should check out Credit.com’s Free Credit Report Card tool for a breakdown of all of your debt. See how you compare to others and set up a personalized action plan to help pay down your debt and increase your credit score.
If you are having trouble making the minimum payments on your credit cards each month, there is a good chance you’ve borrowed well beyond your capacity to pay off your debt in a timely manner.
Reaching out to a nonprofit credit counselor for a free counseling session is a good place to start. A credit counselor will review your budget and look for ways to free up more of your money to apply to high-interest credit card debt. A debt management plan from a credit counselor is another option to consider when you feel as if you are drowning in too much credit card debt.
Many college graduates have the same, familiar woe: too much student loan debt.
According to the Project on Student Debt, seven in 10 college students graduate with student loan debt with an average of $29,400 per borrower.
With good-paying jobs hard to find, staying current with student loan payments can be a struggle. Using income-driven repayment plans for federal student loans such as Pay as You Earn is one way to keep student loan payments a bit more manageable.
If you’ve borrowed too much for a home loan and are struggling to pay your mortgage, it’s a good idea to reach out to your lender for assistance before you fall behind on your payments. Debt help is available but you’ll need to ask for it.
If you owe more on an auto loan than a car is worth, you’ve borrowed too much for your car. And you’ll want to squeeze out those car payments any way you can for a couple of years, since selling your car would likely mean rolling your old debt into a new auto loan.
To avoid getting caught “upside down” and owing more on a car loan than a car is worth, make a down payment of 20% (or more) and limit your auto loan terms to four years or less.
With any kind of debt, falling behind on your payments can hurt your credit. It’s important to check your credit reports and monitor your credit scores each month for free to see how your debt and your payment history affects your credit.