If your situation is critical -- you've fallen behind on your debts, you're being sued by creditors or you have more credit card or medical debt than you can pay off in five years -- you may need to consider bankruptcy.
You also should seek help if:
- You can't pay more than the minimums on your credit cards.
- You're borrowing from one card to pay another.
- You're using payday lenders.
- You're late making payments.
- You've maxed out any of your cards.
Bad-debt-to-income ratio
Not all debt is bad. Moderate amounts of mortgage or federal student loan debt can help you build wealth over time, so you often don't need to rush to pay off these types of debt.
What you really want to tackle first is bad, or so-called toxic, debt. This debt typically has high or variable interest rates and doesn't help you build wealth. Bad debt includes:
- Credit cards.
- Retailer cards.
- Payday loans.
- Pawnshop loans.
- Title loans.
Total your bad debts and compare that to your gross income to come up with your own ratio.
The ideal amount of bad debt to have is none. If your bad-debt-to-income ratio is 6% or less and you're paying it down, you're on the right track. If it's any higher, you need to get serious about knocking out this debt.
| Credit card debt | ||
| By age of head of household | Households with debt | Median debt |
|---|---|---|
| Under 35 | 48.5% | $1,800 |
| 35-44 | 51.7% | $3,500 |
| 45-54 | 53.6% | $3,600 |
| 55-64 | 49.9% | $3,600 |
| 65-74 | 37.0% | $3,000 |
| 75 and up | 18.8% | $800 |
| All households | 46.1% | $3,000 |
| By household income | Households with debt | Median debt |
| Less than $20,600 | 25.7% | $1,000 |
| $20,600 to $36,499 | 39.4% | $1,800 |
| $36,500 to $59,599 | 54.9% | $2,400 |
| $59,600 to $98,199 | 62.1% | $4,000 |
| $98,200 to $140,899 | 55.8% | $5,500 |
| $140,900 and up | 40.6% | $7,500 |
Your daily interest costs
If nothing else inspires you to tackle your debt, maybe this will. You're going to see how much it costs you on a daily basis to remain in debt.
If you have mortgages or student loans, your lenders sent you 1098 forms summarizing how much interest you paid last year. Gather those.
Add to that any interest you paid on car loans and other installment loans. If the interest you paid last year is not clear from your statements, you can use an amortization calculator like this one. (Bankrate.com labels it a mortgage amortization calculator, but the math is the same on any installment loan. Just put in the initial amount you borrowed, the interest rate and the term of the loan, then click "Show/Recalculate Amortization Table," and add up the interest paid for last year.)
Then add in your credit card interest. You can total the finance charges from each month or, if your debt doesn't vary that much, use a recent month's interest charges as an average and multiply by 12.
If you took out any payday, title or pawnshop loans, add in that interest as well. Also include any bounced-check fees from overdraft transaction, since that's another cost of borrowing.
Have your annual total? Divide it by 365, and see how much more money you'd have every day if you were out of debt.
Let's say your total monthly interest cost average about $1,000. That's $12,000 annual, or more than $42 a day that could be spent on other things that are so much more fun.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
