5 Signs That You’re Borrowing Too Much

Consumer debt figures show it: we're getting tired of being so darned frugal. Here are five guidelines to keep you from borrowing too much.

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They’re ba-ack. Like the ghosts in Poltergeist, shoppers have returned this holiday season and they are threatening to stir up a familiar demon—debts they can’t repay.

Black Friday sales set records. Cyber Monday sales were torrid too. Personal spending accounted for the vast majority of third-quarter growth, and spending has been up three of the past four months, reports the Wall Street Journal. The savings rate has fallen to 3.5% from 5.3%.

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This is a marked turnaround from the austerity that has gripped the economy since 2008, and while this burst of consumerism seems likely to persist through year-end, it also seems likely to saddle many with a debt hangover. Things just aren’t that good out there. Household net worth is declining; unemployment is high, and German-led fiscal restraint throughout Europe all but guarantees continued headwinds.

I get it: We’re tired of being so darned frugal. Letting go a bit may make some sense. But before you go any further, now would be a good time for a debt checkup. How much debt is too much? Here are some guidelines:

  • Mortgage Not so long ago, lenders thought nothing of stretching your budget to obscene levels in order to put you in a house. They might have allowed you to commit as much as 36% of your income to a mortgage and as much as 50% of income to total debt service. More traditional limits are in force today—and should be adhered to even in the unlikely event your banker suffers a flashback. That means a mortgage payment that does not exceed 28% of take-home pay and total debt payments that do not exceed 36%. One in three mortgage holders today is above the recommended threshold, reports consulting firm Strategic Business Insights. Try this calculator to see how you are doing.
  • HELOC Closely related to your first mortgage is your home equity line of credit or possibly a home equity loan. Recognize this debt for what it is—an extension of your first mortgage. How much you can safely and smartly borrow with a HELOC or second mortgage depends on how much home equity you have. Your total mortgage-related debt should add up to less than 80% of your home’s value. You’ll get the best interest rate that way, and you’ll be able to tap cash in an emergency. See where you stand with this calculator.
  • Student debt You’ve heard all about it: Student loans now outstrip credit card borrowing and total nearly $1 trillion. The typical grad leaves campus owing $25,000. But some owe five to 10 times that figure. Indeed, SBI reports that 2.3 million have outstanding student debts of $50,000 or more—and that includes some 21,000 who have carried this debt into retirement. A good rule of thumb is to leave campus with no more total debt than your first year’s pay, or to keep your monthly student-debt costs to less than 10% of income.
  • Credit cards Any balance that you carry from month to month constitutes excessive debt. Credit cards should be valued for their convenience and cash-back rewards as well as for the ready access to cash they afford in an emergency. If you must carry a balance, keep it under 30% of available credit on any given card to avoid a ding to your credit score.
  • Auto loans Many people overspend on a car, which they mentally place in the category of a need when it is really a want. Of course you need wheels. But you do not need a new BMW. According to Edmunds.com, the average consumer pays 11% of monthly income to own a car, which leaves little wiggle room for other borrowing—especially if you intend to buy a house. Think of 8% as a ceiling, less if you have credit card balances and student loans too.

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It`s very common for immature students to spend more than their needs to fulfill their desires. So when they take title loans, they end up spending more than they require. So when it comes to counting what they’ve spent, they are very surprised. Which is why I think it`s better to go for payday loans, that way you`ll be very conscious about your finances.