Debt. It’s a four-letter word that can put a lot of stress on people. However, it is important to understand that debt can be effective in achieving your financial goals. And while a small amount of debt won’t hurt, too much debt slowly turns us into a fearful, anxious, struggling person. So, the question becomes: What exactly constitutes “too much debt”? In fact, the answer here is that there is no specific answer. That really depends on personal finances.
This blog will discuss how to check your credit and whether it is great or not with specific strategies.
Check Your Debt-to-Income Ratio (DTI).
It’s not just the total amount of debt you have that defines your credit risk status. It’s also about how much money you’re going to pay each month. This is where your debt-to-income ratio comes into play.
To calculate it:
- Determine your minimum monthly debt payments: student loans, mortgage/rent, car loans, credit card minimums, and other common debts.
- Find an estimate by dividing this amount by your monthly income.
- Multiply the result by 100 to get your income-to-income ratio (DTI).
It shows lenders and, most importantly, yourself, how much income is used to pay off debts and if a person can manage multiple debts. Generally, the DTI ratio is desired to be below 36%, while going above 43% may be an indication of financial stress.
If the DTI ratio ranges from 36-41 %, you will be able to show that the debt is easily paid if you have an income and a good credit score, thus improving your tendency to get financing.
If you want the loan with high debtsas a mortgage, special options such as FHA, VA, or asset-based loans, designed to carry higher DTIs, can be helpful.
Calculate Your Credit Utilization Ratio
While your DTI ratio looks at your overall debt load, your debt utilization ratio focuses more on your credit card debt. Measure how much of your available credit limit you are using. Credit bureaus track this ratio because it can indicate a potential problem in managing credit card debt.
Here’s how to calculate:
- Add up the total balances on all your credit cards.
- Divide this amount by the total credit limit on all your cards.
- Multiply the result by 100 to get the percentage.
Generally, a credit utilization ratio of less than 30% is considered good for your credit score. The lower the rating, the better. Ideally, it would help if you aim to pay off your credit cards in full every month to keep your net utilization ratio at 0%. A high credit utilization ratio, even if you are able to pay your bills on time, can have a negative impact on your credit score. It is because it raises the possibility of overspending or the difficulty of managing debt.
Warning Signs of Too Much Debt
Here are some signs that you may have more debt than you can manage in a healthy way:
- Debt affects your mental and physical well-being: Stress and anxiety from debt can cause sleep disorders, high blood pressure, and other health problems.
- You only make small payments and you don’t withdraw the principal: Small payments can keep you stuck in debt for a long time.
Ideally, you should aim to pay more than the minimum amount in order to lower your principal balance and get out of debt quickly. You can try different strategies such as the debt snowball or the avalanche method to prioritize paying off high interest debts first.
The conclusion
Don’t worry if your debt is too high—there are still ways to get money and manage your debt. Another option is debt consolidation, which allows you to consolidate several debts into one loan with a reduced interest rate. Also, you can work with a credit counseling agency to establish a debt management plan and negotiate favorable terms and fees with creditors.
If you want a loan with high debts, some lenders will still work with you, especially if you show a steady income and good credit history. But don’t take on new debt just to improve your DTI score—instead, focus on managing and reducing your existing debt to improve your financial health.
Source link