What is considered personal debt?
Key takeaways. Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
If you're carrying a significant balance, like $20,000 in credit card debt, a rate like that could have even more of a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges compound, turning what could have been a manageable debt into a hefty financial burden.
After all, the average American carries approximately $8,000 in credit card debt and with interest charges being calculated at today's high interest rates, it's surprisingly easy to find yourself trapped in a cycle of credit card debt with no end in sight.
If your debt barely impacts your life, that's low or manageable debt. There is an important distinction between low debt and manageable debt. $1000 in high interest credit card debt may be low. A 20-year student loan of $30k at 4% may be manageable debt.
Your back-end DTI ratio includes your housing expenses as well as your monthly debt payments, including loan and credit card payments. No matter what kind of mortgage you're getting, a back-end DTI ratio is calculated. This is the number most lenders will take into consideration.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%.
If your total balance is more than 30% of the total credit limit, you may have too much debt. Some experts say to keep credit utilization between 1% and 10%, while anything between 11% and 30% is typically considered good.
- Figure out how much you owe. Write down how much you owe to each creditor. ...
- Focus on one debt at a time. Start with the credit cards or loans with the highest interest rate and make the minimum payments on your other cards. ...
- Put any extra money toward your debt. ...
- Embrace small savings.
| Generation | Average Credit Card Debt |
|---|---|
| Millennials (28 to 43 years old) | $6,932 |
| Generation X (44 to 59 years old) | $9,557 |
| Baby Boomers (60 to 78 years old) | $6,754 |
| Silent Generation (79 and older) | $3,428 |
Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).
Is there credit card debt forgiveness?
One potential path forward is credit card debt forgiveness, also known as debt settlement. This option can, in many cases, reduce your outstanding balance by 30% to 50%. But debt forgiveness isn't available automatically and you may need to meet certain conditions to qualify.
It is not necessary or beneficial to carry a balance on a credit card for credit score purposes. To maintain a good credit score, it is best to pay off credit card balances in full every month.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment.
Bad debt accrues when money due by a certain date isn't paid. This could be as simple as your client forgetting to pay or, in a more serious case, if they've had to liquidate. However, when debt reaches 90 days, it's increasingly more difficult to collect. Therefore, it's important to stay on top of your receivables.
According to Experian, average total consumer household debt in 2024 is $105,056. That's up 13% from 2020, when average total consumer debt was $92,727.
If your monthly income is $2,500, your DTI ratio would be 64 percent, which might be too high to qualify for some credit cards. With an income of roughly $3,700 and the same debt, however, you'd have a DTI ratio of 43 percent and would have better chances of qualifying for a credit card.
Exclude the following from your DTI ratio calculation: Utilities (water, garbage, electricity, gas) Car insurance. Cable and cell phone bills.
If your result is less than 36%, your debt load is affordable, according to NerdWallet. If it's between 36% and 50%, consider taking action, such as consulting a nonprofit credit counseling service, to reduce your debt. 50% or more is “high risk,” NerdWallet says and suggests getting advice from a bankruptcy attorney.
U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level.
What is unmanageable debt?
Personal debt can be considered to be unmanageable when the level of required repayments cannot be met through normal income streams. This would usually occur over a sustained period of time, causing overall debt levels to increase to a level beyond which somebody is able to pay.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.
Overall, the national average card debt among cardholders with unpaid balances in Q3 2024 was $7,236, up from $7,130 in Q2. That includes debt from bank cards and retail credit cards. Six states spread throughout the nation have average balances of at least $9,000.
Most lenders say a DTI of 36% is acceptable, but they want to lend you money, so they're willing to cut some slack. Many financial advisors say a DTI higher than 35% means you have too much debt. Others stretch the boundaries up to the 49% mark.
Consider the snowball method of paying off debt.
This involves starting with your smallest balance first, paying that off and then rolling that same payment towards the next smallest balance as you work your way up to the largest balance. This method can help you build momentum as each balance is paid off.
