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There are very few questions that are simultaneously as simple and complicated as the question “How much debt do I have?” Seems like it should be a simple question, right?
But what gets included in the total? Credit card debt? Obviously. Car loans? Of course. Student loan debt? Probably. Mortgage balance? Ummmm…
So what should you do? Well, for starters, you should start with what you’re comfortable with. Don’t lie to yourself, but that doesn’t mean that you need to beat yourself up excessively either. If your goal is to eliminate all of your credit card debt, then worry about your credit card debt. If you want to be 100% debt free, then you should count everything.
Take A Page From The Mortgage Industry
The banks encourage people to get in debt, so why not use their calculations to determine your debt load? When applying for a mortgage, the mortgage companies typically expect borrowers to have no more than 25% (used to be 28% before the meltdown) of debt related to housing.
So count your housing debt in one bucket. This would include your first or second (or third!) mortgages, any Home Equity loans (remember “Home Equity”?), and any HELOC (Home Equity Line Of Credit) that you have.
In addition, the banks want to see borrowers total debt burden under 35% (used to be 38% or even 41%). For this, include your credit card balances, car loans, student loans, store credit, etc.
Final Thoughts
It’s worth noting that the banks don’t look at your total debt — they look at your debt burden. Specifically, they’re worried about how much you pay monthly to service your debt. Don’t get caught in the trap of thinking in terms of monthly payments! Your debt is the actual amount owed, not what you pay on it monthly. Now is the time to be honest with yourself!
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