A good question to ask about debt is…..how much is too much? 
Consider a debt to income ratio to guide you. If you rent your home, you can figure that your total debt load should be no more than 20%. So, as you are putting a pencil to paper, write down your total income for the month. Then, write down your total debt payment to be made in the same month. Your debt payment should be no more than 20% of your total income or put a little differently, your debt payments X 5 should still be less than your income.
If you are a homeowner, you can figure a bit higher at no more than 28% of your income to put toward debt. You can also figure this with your home included and increase the total debt load to carry as a consumer is 36%. No more. So the maximum debt load, if you are making mortgage payments is 36% of income.
Why? Because it is just too hard to pay back more than this. For many families, right at about their maximum debt load is when they really begin worrying. Because bill paying suddenly gets much harder.
If you find that you are overburdened with debt you may want to consider ways to get your debt to income to a lower level. You may want to use emergency funds to pay down the debt or borrow from a friend or family member or sell something or negotiate with a lender to lower the interest on a loan.
Debt traps. Avoid them. At all costs. A debt trap is a situation where people take out a loan to pay a bill, but find that they have to take out a new loan to make the payment on the first loan. This can become a very difficult cycle. Generally payday loans fit this description.
A common misunderstanding of payday loans is that they are used to manage emergencies. But the fact is that 69% of first time borrowers use the loan to pay for regular bills (Pew Charitable Trust Survey). Another misunderstanding is that the borrowers do have the ability to pay back the loan, but the fact is that many borrowers have to immediately take out a new loan to pay off the first.
Work toward debt reduction. Make a list of the debts you owe, to whom and what the interest rate is. Use the ‘snowball’ method where you pay off the smallest debt first and when that debt is paid off, use the dollars for that debt and the next debt together, effectively ‘snowballing’ your payments. This method helps you see progress quickly and increases confidence about paying off more debt.
Create a plan for debt reduction and stick to it. Help the family understand the limit. Encourage their cooperation as you work the plan. Your persistence will pay off….with a better night’s sleep.
Author: Nancy Stehulak, Extension Educator, Ohio State University Extension of Henry County.
Reviewed by: Kathy Michelich, Extension Educator, Ohio State University Extension of Warren County.
