Mortgage debt is most Americans' largest debt, exceeding other types by a wide margin.
Credit cards, personal loans and private student loans tend to have the highest interest rates, while mortgages and federal student loans tend to have the lowest. Many personal loans, for example, have interest rates between 10% and 29%, and credit cards often have interest rates between 15% and 30%.
The Bottom Line
Different types of debt include secured and unsecured, or revolving and installment. Debt categories can also include mortgages, credit card lines of credit, student loans, auto loans, and personal loans.
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.
50% or more: Take Action - You may have limited funds to save or spend. With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses. With this DTI ratio, lenders may limit your borrowing options.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
You may notice slight variations between different lenders' calculations of DTI, but generally, these amounts are considered debt: Monthly housing costs, including a mortgage, insurance, homeowners' association fees and property taxes. Rent payments. Home equity loans or lines of credit.
Examples of secured debt are home mortgages and auto loans. These debts are tied to the value of the car or home you purchase with the loan. If you stop making payments, the lender can repossess the property tied to the loan.
Mortgage. This is the most common type of secured debt. When you obtain a mortgage, your home acts as collateral for the loan until you pay off the balance in full. Mortgages come with fixed and variable rates; terms can last 25 years or more.
Good debt is money you borrow for something that has the potential to increase in value or expand your potential income. For example, a mortgage may help you buy a home that can appreciate in value. Student loans may increase your future income by helping you get the job you've wanted.
Bad debt is debt that cannot be collected. It is a part of operating a business if that company allows customers to use credit for purchases. Bad debt is accounted for by crediting a contra-asset account and debiting a bad expense account, which reduces the accounts receivable.
Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year. Paying off that bill?
Senior debt has the highest priority and, therefore, the lowest risk. Thus, this type of debt typically carries or offers lower interest rates. Meanwhile, subordinated debt carries higher interest rates given its lower priority during payback. Banks typically fund senior debt.
The United States has the largest external debt in the world. The total number of U.S. Treasury securities held by foreign entities in December 2021 was $7.7 trillion, up from $7.1 trillion in December 2020. Total US federal government debt breached the $30 trillion mark for the first time in history in February 2022.
The following payments should not be included: Monthly utilities, like water, garbage, electricity or gas bills. Car Insurance expenses. Cable bills.
Your debt-to-income ratio does not factor in your monthly rent payments, any medical debt that you might owe, your cable bill, your cell phone bill, utilities, car insurance or health insurance.
Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you're a cash method taxpayer (most individuals are), you generally can't take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items of taxable income.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
Generally speaking, cars purchased with a large down payment and with a short-term car loan are considered to be good debt. That's because large down payments usually mean lower interest rates. Further, a shorter loan term means you'll pay less in interest over the life of the loan.
Key Takeaways
Types of debt that cannot be discharged in bankruptcy include alimony, child support, and certain unpaid taxes. Other types of debt that cannot be alleviated in bankruptcy include debts for willful and malicious injury to another person or property.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
For example, a general rule of thumb is if roughly half of your monthly income is committed to debt payments, there's a good chance you have too much debt. Your debt-to-income ratio (DTI) is a reliable benchmark for evaluating the health of your personal indebtedness.
Basically, a passbook loan is a loan you take out against yourself. You are borrowing from your bank or credit union using your savings account balance as collateral. A passbook loan uses the balance of a savings account as collateral, which makes it lower risk for a lender.