Borrowing money can be a useful financial and credit-building tool. Loans can allow us to attain financial goals, including going to college and buying a home or a car. Certain financing can also be very convenient and cost-effective. For instance, you can earn rewards, take advantage of certain price protections and minimize the odds of being on the hook for fraudulent charges when using a credit card. But how much debt is too much debt? The answer can vary, depending on your overall financial health and what type of loan you’re talking about. However, here’s a general rule of thumb: Any debt you can’t pay off as agreed — meaning you’re missing payments or going over your credit limit — is a debt best avoided.
After all, high loan balances and missed payments can severely damage your wallet — and your credit score. You can calculate the lifetime cost of your current debts and you can see how your debt levels are affecting your credit scores by viewing your free credit report snapshot, along with two free credit scores, updated every 14 days, on Credit.com. You’ll be able to set up a personalized action plan to help pay down your debt and increase your credit score. Here are some more guidelines regarding how much debt is too much.
How Much Is A Lot of Credit Card Debt?
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.
You can create your own repayment plan using Credit.com’s Credit Card Payoff Calculator. Alternately, if you can’t seem to break the cycle, reaching out to a nonprofit credit counselor for a free counseling session could help. 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. (Note: There may be fees for credit counseling services.)
How Much Student Loan Debt Is Too Much?
Many college graduates have the same, familiar woe: too much student loan debt. According to the Project on Student Debt, 7 in 10 seniors graduating from public and nonprofit colleges in 2014 had student loan debt, with an average of $28,950 a piece.
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. You can also ask your student loan servicer about other repayment or forgiveness programs you may qualify for.
How Much Mortgage Debt Is Too Much?
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. You can learn more about how to save your home from foreclosure here.
How Much Auto Loan Debt Is Too Much?
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.
Remember, 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 for free to see how your debt and your payment history affects your credit.