Having debt is not bad. Everybody has some debt. In may be in form of credit card balance, education loan, auto loan or mortgage. Having too much debt can really make life difficult. Imagine the bank call asking to pay your overdue amount. It feels bad, doesn’t it? So how do you avoid getting in the tangle of having too much debt? Just spend some time to add up the total debt you have. This number will tell you many things.
Calculating debt-income ratio can help you figure out whether you have too much debt. It is just comparing the debt you have to monthly earnings. Debt also is of two types: (1) The debt on which you make regular payments is the Good Debt and (2) The debt which has been overdue for a long period is the bad debt. You need to calculate two ratios, one including all debt and the other having just the bad debt. The ideal Total debt Vs Monthly income is 3:1 and Bad Debt Vs Monthly income is 10:1.
So, if you are having more than 10% payments monthly for your bad debt means that is too much.
Consequences of too much debt are really damaging. Some of the important ones are:
- Stress is the most damaging part of having too much debt. You are always under the pressure to pay. Believe me it is very bad for your physical and mental health.
- Too much debt means you falter on your payments. Faltering on payments affects you credit score negatively, and it becomes difficult to get loans when you really need it.
- You pay more interest to the lending company and this will keep on adding to your debt.
So what do you do? Here are a few tips:
- Set up your debt limit. Do not let it be more than one third of what you earn.
- Pay full credit card bills and be regular. Paying minimum payment only increases your debt load.
- Make periodical review of how much debt you currently have.
- If you are facing problems making payment, call the company to make changes in payment plan.
- Never take new debts to pay off old ones. It is a vicious cycle.
Be careful with your debts and enjoy your life. It is much easier to do so with controls put on debt.