Take on certain debts, like student loans or mortgage, for something that have the potential to increase in value over time is considered good. But how do you know how much debt is too much? Liz Weston, on personal finance website NerdWallet, provides some answers:
- House: “Capping housing costs at 25% of your income can give you the financial flexibility to juggle all the other important financial goals in your life.”
- Student loan: “Your payments should eat up no more than 10% of your gross income.”
- Auto debt: “Car payments in the range of 5% to 10% of gross monthly income. Car loans should be for four years or less and ideally accompanied by a 20% down payment so you don’t spend years owing more than the car is worth.”
- Credit card debt: “Pay your balances in full every month.”
- Toxic debt: “Avoid at all costs, includes payday loans, no-credit-check loans, title loans and rent-to-own schemes.”