A debt-to-income (DTI) ratio over 36% can signal financial trouble. Calculate your DTI by dividing monthly debt payments by monthly gross income.

Warning Signs You Have Too Much Debt:

• Debt balance not decreasing despite regular payments
• Living paycheck to paycheck
• Unable to contribute to retirement plans
• Can't build a $500 emergency fund
• Using credit cards for cash advances

Understanding Different Types of Debt:

Good Debt:

• Low, fixed interest rates
• Builds value (homes, education, business)
• Tax-deductible interest
• Manageable monthly payments

Bad Debt:

• High or variable interest rates
• Finances depreciating assets
• Extended loan terms
• High-interest credit cards with growing balances

Toxic Debt:

• Payday loans (APR above 36%)
• No-credit-check loans
• Excessive repayment terms
• High-interest loans requiring vital collateral

Debt Guidelines by Category:

Housing:

• Keep mortgage costs under 28% of income
• Consider refinancing if rates are favorable
• Explore downsizing options if overextended

Student Loans:

• Borrow less than expected first-year salary
• Explore income-driven repayment plans
• Consider refinancing for better terms

Car Loans:

• Total auto costs should be under 20% of take-home pay
• Aim for 5-year maximum loan terms
• Make 20% down payment when possible

Medical Debt:

• Negotiate with billing offices
• Set up manageable payment plans
• Consider debt relief options if necessary

Take immediate action if your DTI exceeds 43%. Consult a nonprofit credit counseling agency between 43-50% DTI, and consider bankruptcy consultation if over 50%.

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