What is a dangerous level of debt?

RAS

We had a rather interesting OP on here before Christmas; monthly spend was nearly £7.5K on the budget, with £3.5K being the mortgage. Credit on two cars plus consumer credit as well.

With some help the monthly budget was reduced £5K including the mortgage and credit payments.

Potential income at that point - JSA.

She had been redundant for a several months and he had just been made redundant with a good package.

Income before she was made redundant - £6K per month, reduced to £4K.

They had been living beyond their means for some time and had not acted when the first wave hit.

OK, the plan was to sell the house and rent somewhere smaller, ditch one car and use his redundancy to tide them over, but in a very few months their world had been turned upside down.

So, the question is whether your lifestyle is sufficiently flexible to allow you to roll with the punches.

debtdesperado

I agree with the above. I think the way to think of debt is that every time you borrow money now, you are stealing from your future.

I earnt nearly £90k pre-credit crunch, and had £42k of debt... 50% of salary. I took home nearly £5k, and out of that £3k went on debt repayments, including mortgage. Fine, I could keep servicing the repayments so it wasn't a dangerous level of debt...although it niggled me. I earnt loads of money, so why was it never enough?

Then I got made redundant. It took being out of work for a long time, and undergoing immense stress caused by my financial situation to realise what a burden my attitudes to money and debt actually were.

I knew what money could BUY, but being out of work made me realise what money can DO in terms of providing comfort and security, which are major things to contribute to a happy life. I know that money isn't everything and certainly, if you think of all the pointless stuff it can buy, it really isn't everything - but when you keep it as money, in it's place it can really contribute to your basic security.

Sorry to get all philosophical!

DarkConvict

I think loss of main income for 6 months could be a good indication. Could you cope?

Personally i plan to be able to make full payments on my debts every month, excluding the mortgage. That is my plan anyway, so i do not have to make the decisions of can i cope, I intend to spend within my limits.

kingfisherblue

I have about £160 on my credit card at the moment and it worries me! As others have said, if you were suddenly without a salary, could you pay your debts? I'm on benefits as my son has complex needs, so my income isn't very high, but I budget well. I don't want my CC hanging over me though, so I intend to pay it off ASAP.

Spirit_2

The comfort level with debt can change very quickly.

In 2002 we had a joint income of £130,000 and debts of about £40,000 plus the mortgage - we felt our debt to earnings ratio was reasonable. Mr Spirit was made redundant loss of £90,000 income and suddenly the debt to income ratio was 1:1........it got worse as we could not turn off our costs quickly enough and the debt repayments were a burden . Eventually debt grew to £68,000.

I threw myself into getting promotion, Mr Spirit got another job and our income in 2010 is £130,000 and our debts are £11500. We will be debt free this year. Our income is now virtually "our own" instead of our creditors.

We choose to make overpayments to clear debts and to reduce the mortgage term.

If you can comfortably afford your standard of living if:

Your salary falls
You become ill and cannot work/occupational sick pay runs out
Your partner leaves
You become a carer
Your living costs rise materially

AND you can afford debt repayments as well then debt may not be a problem.

GeorgeUK

I would suggest that once the debt became more than 4 times the monthly income, that would be the danger area.

I suppose it would depend on the interest rates you were paying too but if it were high street rates then this is where i would put up the warning flags.

MrsTinks

I really dislike the term "dangerous" debt... I think it's misleading and over dramatic...
There is affordable debt and unaffordable debt
Then there is debt you can deal with even if your income takes a tumble...

We have more debt than you between us (a lot more if you count the cars!) but we also earn considerably more. we have a fab mortgage at the moment (1.1% above base rate... :martin:)
And I have made sure we have PPI in place (independant!) to cover us SHOULD either or both of us be made redundant.

Oneday77

It depends on the debt.
If it is the mortgage then 3x income is average and sensible max, higher was the reason the credit crunch came about.
Unsecured credit ie loans and CCs where they are costing more than 20% of income after priority payments like mortgage, utilities, CT, food & TV.Licence.
I base this on say you have £500 spare & then pay £100 on servicing debts. What do you really need imediately that you can't wait 5 months to save up for at £100 a month, everything else is a luxury.

Dave101t

with a net income so high, i wonder why you rely on cards?.
any debt with an additional 130k mortgage would have me crapping myself each and every month....

[Deleted User]

natsplatnat wrote: »

For me, if I couldn't at least 'service my debt' and put food on the table, then I would class it as dangerous. Once you realise and become dedicated to clearing a debt you do need to throw everything you can at it. At the end of the day, it would be safer to have zero unsecured debt! Thats what I am aiming for! *dreams - one day!*

Thats it I can pay it and theres no danger of not being able to pay (assuming I dont lose my job or something) and we can afford to pay for things...