How Much Debt is Too Much?

Most of us carry around debt and it's part of how the American economy functions. Credit is leveraged so that we can buy a home, a car and all of the big ticket items we've become accustomed to. At some point though, the cost of carrying around all that debt, especially high interest credit card debt, can become too much to handle.

So it begs the question. How Much is Too Much?
There are a number of answers to this question, from anecdotal things like "it's too much when you can't make your monthly obligations", to debt-to-income ratios and other formulaic solutions.

The Federal Reserve Bank says if debt obligations account for forty percent or more of your gross income, that is a sign of financial distress. Admittedly, forty percent sounds a little low, especially if you have a mortgage payment to make each month.

Does the Type of Debt Matter?
Absolutely. If you have $200,000 in mortgage debt, that's not unreasonable. Home loans typically have low interest rates and owning a home has many great tax advantages. Not to mention, given a long enough time frame, the appreciating value of real estate can net you a good return.

Now, if you had the equivalent amount in credit card debt you would be in real, real trouble. The payment on something like that would be astronomical given typical credit card interest rates.

As a general rule, anything above $15,000 in credit card debt is a serious concern. At that point, the interest charges become very large making it really hard to pay it down.

On an "average" income, $15,000 in credit card debt is probably going to take years to pay off. Add in a few purchases here and there, and it's no wonder many of us wind up carrying a revolving balance of credit card debt for years or even decades.

What Should You Do If You've Got a Ton of Credit Card Debt?
If possible, see if you can consolidate that debt into one low interest loan. Talk to your banker about any options that may be available. If you can get a low interest loan and pay off all those cards, you can make sure more of your monthly payment goes towards paying down your principle rather than paying your credit card companies profits.

Avoid any ads you see of companies claiming to settle your credit for pennies on the dollar. More often than not, they do nothing for you that you couldn't do yourself. See this post on debt relief companies for more on that.

Bankruptcy may be an option if consolidation or negotiation aren't the answer. It certainly is not to be taken lightly, and a bankruptcy will affect your credit report and ability to get credit for a year or more. However, if you're already struggling, the your credit is not a major concern, and a bankruptcy may actually help you get your credit back faster than just sitting on a lot of debt for years to come.

Credit card debt is almost always discharged completely by a bankruptcy, so it is one option if your debt is mostly credit cards.