Home > Managing Debt > How Much Debt Is OK?

Comments 0 Comments

Most of us will take on debt at some point in our lives. Whether it is a mortgage, student loan, credit card or personal loan, borrowing money can cause stress. Less debt always sounds like a good idea, but this can be a bigger challenge than we realize. And avoiding debt completely may not even be as important as we think. You can find some details about debt below to help you better assess when it may be OK to take on some of it.

The General Rule 

You may think having no debt is the goal – and for some people that might be true. If owing even a small amount of money makes you so anxious you can’t sleep or your health is otherwise suffering, you might be better off avoiding all debt. But for most people, it’s important to find a manageable amount of debt. Borrowing some money is generally needed for some of life’s biggest purchases like buying a home.

Before taking out a mortgage or a loan, it’s important to do some research and have a plan. It’s good to know how much you need to borrow, how much money you will pay for borrowing that money (in fees and interest) and how long it will take you to pay it back. Having a budget that shows you how much money you have coming in and how much you owe can help. It’s always good to be aware of how the size of your debt compares to the money you make. Your debt-to-income ratio (DTI) is how much you owe in monthly payments over your gross monthly income.

Debt By the Numbers

Your debt-to-income ratio tells you a lot about your financial health. Of course, the actual number of dollars one can safely be indebted is different for everyone. The general rule of thumb for mortgage underwriting, for example, is that a debt-to-income ratio at or below 36% is preferable. The lower the number is, the better your balance between debts and income. The number will almost always come up in the lending process.

How much debt you are carrying will also affect your credit utilization rate, a major component of credit scores. It’s generally recommended that you keep your credit utilization rate — how much debt you are carrying versus how much credit has been extended to you on revolving accounts like credit cards — below 10%, though, again, the lower the better. You can keep an eye on your credit utilization rate by monitoring your credit. (You can get your free annual credit reports at AnnualCreditReport.com or see your credit scores for free each month on Credit.com.)

Understanding Your Debt Status

Though managing your debt is related to your income and personal financial situation, it is always good to look at your debt more closely. You may want to divide debt into good debt and bad debt – by lender, reason you borrowed, amount or even interest rate. Going beyond the ratio to assess how you take on debt and how much of each type you have can give you a more complete picture of where you stand financially.

Now that you know more about gauging how much debt is manageable, you can evaluate what you currently owe. If you have too much debt, it can be a good idea to go through your budget to cut down spending and focus on repayments until you’ve gotten a better handle on it. Your debt has a big impact on your credit score, spending power and overall financial health. You cannot afford to ignore it — but it’s OK if it exists.

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team