What to Do When You Have Too Much Debt

According to Northwestern Mutual’s 2018 Planning & Progress Study, the average personal debt that Americans have is up to $38,000 and that doesn’t include mortgages.

25% of all debt comes from credit card debt. It’s not surprising that those between 18-34 years of age accumulate an average of $22,000 - most from student loans followed by credit card balances. Even baby boomers who are at ages 50 and up have at least $36,000 in debt. While this amount is less than those in younger generations, it’s still a staggering number for people who may not have a lot of savings and are too close to retirement. Some may be forced to work longer than planned or they might have to use their retirement fund to pay up their debt.

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How Much Debt is Too Much?

Experts say that having debt can be considered healthy financially speaking just like home mortgages or student loans. The mere fact that you have one or multiple debt is not the indicator of having too much. It is a combination of numerous factors that usually end up in a domino effect towards financial hardship.

Debt-to-Income Ratio

Your debt-to-income ratio is one of the simplest ways to check if you have too much debt or not. Just add up all your minimum monthly debt payments like credit card debt, personal debt, medical bills, payday loans, tax liens and/or collections; divide the total by your gross monthly income.

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A DTI of less than 36% is considered favorable for financial institutions. However, if your ratio is more than 43%, you may not be able to qualify for mortgage programs.

Paying the Minimum Each Time

Missing payments is not a clear sign of your debt getting out of hand. It’s when you are stuck paying the monthly minimum payments. Ideally, you should be able to pay off your balances in 3 to 5 months’ time to be able to say you have your debt under control. When you pay the least amount needed, not only will it take time for you to settle your debt for good, but you will rake in a huge amount on interests.

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High Credit Card Debt

It’s not good if your credit card bills are almost as high as your mortgage and car loan payments. Unlike other long term debts and bills, credit card debts have higher interest rates. That is why credit cards are as dangerous as they are useful. Plus, having a bunch in your wallet makes it too easy to accumulate debt from unnecessary expenditure. You may even be paying for money you don’t have.

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You’re Low on Emergency Fund

An emergency fund is useful because it’s your safety net should you have an unexpected hurdle in life like job loss, sickness or calamity. Typically, it should be the amount of your expenses for at least 3-6 months. The higher the better. If you have a low, nonexistent emergency fund, or if you are using it towards your debts, it’s a red flag. Your emergency fund won’t replenish itself unless you put a certain budget towards it each month. Plus, it might take a while for you to save up and harder as well if you are having a hard time budgeting your money because of debt.

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Good Debt vs. Bad Debt

If you have a loan where in the interest rate is low and fixed, and grows in value like a business, home, property or college education, it’s a good debt. You may be putting $100,000 towards your house or business but your asset’s value increases over time. It’s also worth mentioning that most student loans and mortgage interests are tax-deductible.

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As mentioned above, credit card debts and other loans with variable and high interest rates are considered bad debts especially when they are used to purchase consumables, items that depreciate and may not hold any value. They may be unsecured and unattached to a collateral but they sure will eat up your cash flow.

Also avoid short term loans with high APRs. You usually end up paying more than the item you are purchasing. Some payday loans also require collaterals so they are considered secured loans which come with too much risk.

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Get Out of Debt

Budget Wisely

Sometimes, all it takes is a paradigm shift and some control to get back on your feet. Figure out how you got in so much debt in the first place. Reconsider your lifestyle and see what changes can be done. Your expenses should never exceed your income. Take cuts if necessary.

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Consider Professional Help

If you have done everything yet you are still falling behind your payables. Consider professional debt help. Debt relief companies have been around for more than 20 year to help people in debt like you. Just make sure to choose one that has been in the industry for a long time because they usually have more experience and good track record for being in business for so long. They can help alleviate and take care of debt not only at present but long term by eliminating your debt for good. Debt relief companies negotiate with your creditors for a lowered amount but in a lump sum, to as much as 50%-70% savings from the amount owed. A debt repayment plan is set up according to your unique financial situation. This leads to debt forgiveness and paying off your debt in the lowest amount possible, at the least amount of time.

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Seek Long Term Goals

It’s better to deal with debt right away: the earlier, the better. If you see yourself with red flags as mentioned above. Don’t delay. However, if you are already in deep in the debt trap, it’s never too late to climb out of the hole you are in. Start with baby steps you can do like changing your habits, curbing your impulses and finding ways to create extra income. Formulating a realistic budget or utilizing online tools may also help. If worse comes to worst and you still have a hard time coping, take advantage of the free consultations of reputable debt relief companies. Their assessment is usually free of charge and highly confidential. Since they handle individuals who are in the same boat as you, they can gauge which program may suit you best.

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