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How to figure out if you have too much debt

If you have debt, you are not alone. Approximately 65 percent of people in the United States pay interest on credit card debt. Having some debt is okay, and it can even be healthy if it is related to some sort of goal, such as earning a degree or owning a home. So, when does it become too much?

Figuring out when enough is enough is subjective. The answer depends on various factors. Here are some pieces of advice to help you determine whether your debt is overwhelming.

Calculate your income-to-debt ratio

Ratios are a good starting point when figuring out just how much debt you have. Simply compare your gross income to your various debts, such as credit card debt, personal loans, medical bills, payday loans, tax liens and collections.

If the ratio is lower than 15 percent, it should be manageable through some budgeting. If it is between 15 and 39 percent, you may need to explore professional debt relief options. However, if it is at least 40 percent, you have a high-risk debt load that may require bankruptcy. 

Evaluate the type of debt you have

It is vital to distinguish between productive debt and toxic debt. If you have a loan with a low, fixed interest rate for something that will grow in value, such as a home, college education or business, it is probably a healthy debt. It is also preferable if it has tax-deductible interest. 

An example of bad debt is a loan with a variable or high interest rate you use to buy something that loses value or goes away quickly. This includes personal loans for vacations or auto loans that last for five years or longer. Even worse are loans with APRs that cause you to pay more than the item is actually worth. Some loans even require you to use cars as collateral, which is not ideal. 

If your debt is substantial and/or toxic, you may need to consider filing for bankruptcy.

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