Good Debt

KXAN's Studio 512 welcomed UFCU Financial Health Program Manager Monica Muñoz Andry to talk about debt. UFCU is passionate about helping you achieve your dreams, and Studio 512 is proud to have financial experts from UFCU join their Simple Health team.

According to financial experts, about 80 percent of Americans are currently in debt. This is a stressful reality for many, and something people want to hear about. Is all debt bad?

Not all debt is bad debt. Certain investments, such as buying a home or getting an education, may require you to take out a loan in order to afford the cost. These investments are generally considered to be “good debt” because they have the potential to increase your earning potential, or to appreciate, meaning they will rise in price or value over a period of time.

In that case, can you help us identify how much debt is too much debt?

The debt-to-income ratio is one tool used by financial institutions to assess whether you have too much debt.

Debt-to-income (DTI) ratio measures how much of your income you are paying towards your debt: total monthly debt payments divided by gross monthly income. You can calculate your debt-to-income ratio by adding up your monthly payments and dividing that sum by your monthly pay before taxes to determine the level of debt you are carrying. Generally, an acceptable debt-to-income ratio should be at or below 36 percent.

What strategies can I use to pay off debt?

There are two strategies that are commonly used to pay off debt — the Avalanche Method and the Snowball Method. Both are designed to pay back debt as quickly as possible

• With the Avalanche Method, focus on paying extra on the debt with the highest interest rate while paying the minimum on the rest.
• The Snowball Method means you pay off the smallest debt first and then roll that payment toward the next smallest debt, and so on. Like a snowball, it accumulates and that payoff keeps getting bigger and bigger!

If it’s a credit card, student loan, or mortgage, understanding how debt works, knowing where to go for help, and creating a plan are the keys to better manage your debt.