Debt, Credit Cards, and Saving for Retirement

High levels of debt and the misuse of credit cards can make it difficult to save for retirement. Money spent on interest, late fees, and old balances is money that could otherwise be invested toward long-term goals.

How Much Debt Is Too Much?

Debt itself isn’t always bad, but too much debt can strain your finances. Add up your monthly payments for car loans, student loans, credit cards, charge cards, and personal loans—everything except your mortgage. Divide this total by your monthly take-home pay to determine your debt ratio.

• Try to keep non-mortgage debt at 10% or less of your take-home pay.
• Total debt, including your mortgage, should ideally be no more than 36% of take-home pay.

Good Debt vs. Bad Debt

Some debt can provide long-term financial benefits. This includes borrowing to buy or remodel a home, pay for education or career training, or purchase a reliable car needed for work. These are examples of good debt.

Bad debt occurs when you borrow for things that don’t provide lasting value, such as vacations, clothing, furniture, or dining out.

Do You Have Debt Problems?

Warning signs include:

• Borrowing to pay off other loans
• Receiving calls from creditors
• Paying only the minimum on credit cards
• Maxing out credit limits
• Borrowing to cover regular bills
• Being denied credit

Two Important Steps You Can Take Today

Avoid High-Interest Loans

Loan offers that arrive by mail, pawnshop loans, and payday loans are often extremely expensive. Rolling over a payday loan every two weeks for a year can result in interest charges exceeding 600%. Always read the fine print and focus on the total cost of the loan—not just the monthly payment.

Handle Credit Cards Wisely

Credit cards can be useful tools, but misuse can lead to long-term debt. For example, making only a 2% minimum payment on a $2,000 balance at 18% interest would take 30 years to pay off.

Tips for responsible credit card use:

• Keep only one or two cards
• Avoid charging large purchases
• Shop for the best interest rates and fees
• Pay off the balance each month, or at least pay more than the minimum
• If needed, leave cards at home or cut them up

If debt becomes overwhelming, a reputable credit counseling service can help you work with creditors and create a repayment plan.