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Too Much Debt?

You know you have too much debt when...

• you put off paying bills because you're worried that you won't have enough money to cover your debts
• you juggle bills each month just to get by
• you use credit cards to buy necessities, such as food, gas, or rent
• you get a cash advance from one credit card to make a payment on another card
• you avoid answering the phone because of frequent calls by bill collectors

These are only a few of the indicators that signal that you may have a problem with too much debt.
To determine if you have more debt than you can manage, calculate your debt/income ratio. To do this, add up the total of your monthly consumer credit payments. Don't include mortgage or rent, utilities or taxes in this calculation but, rather, consumer debts like credit card payments, car loans, and student loans. Then determine your monthly after-tax (net) income. Don't include overtime or bonus pay unless they are guaranteed.

Divide your monthly consumer debt payments by your total net monthly income. The result is your debt/income ratio. For example, if your total monthly credit payments add up to $300 and your total monthly after-tax income is $1,800, your monthly debt/income ratio would be calculated as 300 divided by 1,800 = .1666 or 16.7%.

What does this mean? If your debt/income ratio is 15 percent or less, you're probably in good shape credit wise and can handle your monthly payments. If your ratio is 20 to 30 percent, you are probably starting to experience financial difficulty, especially if you have other large expenses such as a mortgage or child care. Too much of your paycheck is going toward yesterday's spending.

If your debt/income ratio is 30 percent, or higher, you have way too much debt. You need to drastically curtail spending and should probably see a credit counselor. With so much of your after-tax income earmarked for debt payments, there isn't much left for other expenses. The Consumer Credit Counseling Service of New Jersey can be reached at 888-726-3260.

If you need information about budgeting or if you need to learn some strategies for saving money on a variety of household expenses, contact Rutgers Cooperative Extension for free publications and a low-cost PowerPay debt reduction analysis. For further information about Rutgers Cooperative Extension programs and services, call 973-579-0985 weekdays during business hours.

This message is sponsored by Rutgers Cooperative Extension. For further information about available educational programs and other services, contact your local Rutgers Cooperative Extension office.