The Consumer Financial Protection Bureau recommends you keep your debt-to-income ratio below 43%. Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments. The highest ratio you can have and still be able to obtain a qualified mortgage is also 43 percent.
While the average American has $90,460 in debt, this includes all types of consumer debt products, from credit cards to personal loans, mortgages and student 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%.
Many people would likely say $30,000 is a considerable amount of money. Paying off that much debt may feel overwhelming, but it is possible. With careful planning and calculated actions, you can slowly work toward paying off your debt.
About 52% of Americans owe $2,500 or less on their credit cards. If you're looking at $5,000 or higher, you should really get motivated to knock out that debt quickly.
In general, you never want your minimum credit card payments to exceed 10 percent of your net income. Net income is the amount of income you take home after taxes and other deductions. You use the net income for this ratio because that's the amount of income you have available to spend on bills and other expenses.
The simplest way to make this calculation is to divide $10,000 by 12. This would mean you need to pay $833 per month to have contributed your goal amount to your debt pay-off plan. This number, though, doesn't factor in the interest on your debt.
The student loan payment should be limited to 8-10 percent of the gross monthly income. For example, for an average starting salary of $30,000 per year, with expected monthly income of $2,500, the monthly student loan payment using 8 percent should be no more than $200.
The auto loan itself would be considered the "debt." The payments toward it would be considered "debt payments." With regard to your credit report, if you are applying for another loan somewhere and they looked at your debt-to-income ratio, the monthly auto loan payments would be included on the debt side.
How much debt is a lot? The Consumer Financial Protection Bureau recommends you keep your debt-to-income ratio below 43%. Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments.
This means that total household debt (not including house payments) shouldn't exceed 20% of your net household income. (Your net income is how much you actually “bring home” after taxes in your paycheck.) Ideally, monthly payments shouldn't exceed 10% of the NET amount you bring home.
Kevin O'Leary, an investor on “Shark Tank” and personal finance author, said in 2018 that the ideal age to be debt-free is 45. It's at this age, said O'Leary, that you enter the last half of your career and should therefore ramp up your retirement savings in order to ensure a comfortable life in your elderly years.
When you have no debt, your credit score and other indicators of financial health, such as debt-to-income ratio (DTI), tend to be very good. This can lead to a higher credit score and be useful in other ways.
And yet, over half of Americans surveyed (53%) say that debt reduction is a top priority—while nearly a quarter (23%) say they have no debt. And that percentage may rise.
Character, Capacity and Capital.
Prepayment penalties
Some lenders charge a penalty for paying off a car loan early. The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won't pay any more interest, but there could be an early prepayment fee.
Examples of good debt are taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt. Each may put you in a hole initially, but you'll be better off in the long run for having borrowed the money.
Several told me a rule of thumb is that total undergraduate borrowing should be limited to what you might expect to make your first year after graduation. By that measure, many college graduates seem to be doing well: Average debt is about $37,000 and first-year salaries are close to $40,000, on average.
Is $50,000 in student loan debt a lot? The resounding answer is yes, $50,000 is a lot of student loan debt. But when you consider the cost to attend college and that most students take four to five years to graduate, that figure isn't a surprise.
It's best to avoid using savings to pay off debt. Depleting savings puts you at risk for going back into debt if you need to use credit cards or loans to cover bills during a period of unexpected unemployment or a medical emergency.
While that seems like a lot of money, it goes almost nowhere as far as paying off the balance. The average credit card interest rate in 2021 was 16.13%. With 16% interest, it would take 447 months (more than 37 years) to pay off $30,000 in credit card debt. The final bill would be $69,459.47.