A debt is a burden. In the case of a financial debt, you must dedicate a portion of your income or assets to paying off that obligation, which could prevent you from achieving other financial goals. If you want to better manage your finances it's important to know what percentage of debt is "normal" or acceptable for someone in your financial situation.
Types of Debt Accounts
Know the various types of debt accounts before answering the question of what percentage of debt is an acceptable level. The four main categories of debts are secured, unsecured, revolving and installment loans. Secured debts are tied to an asset, such as a car or home loan, unlike unsecured debt such as credit cards and personal loans. Revolving debt continues to persist and the payment amounts vary, as in the case of home equity credit lines and credit cards, while installment loans commonly maintain a level payment and have a definite end date.
Why Is This Important?
It's important to know exactly how much debt you carry at any given time. For one, part of your credit score is based on the total debt you owe to creditors. In fact, the total debt you carry makes up 30 percent of your credit score calculation. Your credit score also takes into account the mix of various debts (10 percent of the calculation). Knowing the percentage of debt you owe is also important if you plan to apply for a new loan in the near future --- lenders use this information when evaluating loan applications.
For Mortgages
When applying for a mortgage loan, lenders prefer that your total monthly debt payments not exceed 36 percent of your gross income. That includes all debts from car loans to your proposed mortgage loan payment. So if you plan to get a mortgage make sure your debt is below that maximum.
Debt Free
In truth, the ideal debt percentage to hold is zero in most cases. Though going debt-free might not help your credit score, it does give you the satisfaction of knowing that you're not obligated to anyone but yourself. Without debt payments you can save more toward your future, including retirement, education and raising a family.
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