The first step in getting out of debt is identifying the problem. Problems with debt tend to range in severity. From a professional level we tend to see anyone carrying more than the average balance as problematic. According to The Balance, as of 2018, that amount is $7,527. If that makes you excited that you are way under that number that’s a good thing! If that makes you nervous that you exceed that amount….. well good. It should be a call to action. As a country talking openly about debt is something we rarely do and most people assume they carry an average debt load when in fact they have a serious problem.
Obviously income plays a huge role in this. Someone making $30,000/year will have a more difficult time paying off $7500 than someone making $100,000/year. Retirees getting by on a fixed income may have difficulties keeping up with even an average debt load. So it is important to identify what percentage of income can be “safely” carried and paid off in a reasonable time period without getting buried in high interest payments.
So long as all other bills are average (you didn’t purchase too much house or buy a car out of your income range) a person can carry 10% of their gross income in unsecured debt without too much trouble. So for instance: If you make $30,000/ year you shouldn’t carry any more than $3,000 in credit cards or unsecured loans. If you make $100,000 no more than $10,000. Why? It’s easy to make double or triple the minimum payments and pay the debt off in just 2-3 years as opposed to having decades of payments or needing a professional to help. It’s also easy to still be able to save for emergencies if you’re carrying 10% or less as a debt load. Chances are good if you’re carrying that little in debt your credit cards aren’t negatively impacting your credit score yet. It’s better all around.
This of course is not to be confused with utilization as we’ll address that in a new post soon.
Debt Rx 