Borrow Carefully

Find out if you're in the debt danger zone!

Read: 5 minutes

How much debt is too much?

It can be tricky to tell if you're carrying too much debt, especially if you've managed to pay your bills on time and creditors aren't currently hounding you. But just because you've kept your head above water doesn't mean you're on safe ground; in fact, you could be in a debt danger zone without even realizing it.

To put yourself in a healthy place financially, here are seven key steps to giving your debt a check-up.

1. Get real about your total debt

Start by tallying up all of your current obligations, including credit card bills, student loan payments, auto loans, car notes, mortgages, personal loans, and any other ongoing financial responsibilities. Listing your debts in black and white can be an important wake-up call because you'll now know precisely how much you owe—as opposed to guessing or estimating your debts.

2. Attack “bad" debt first

“The highest interest rate debt is the most toxic," says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “Credit card bills and anything subprime—like payday loans or car title loans—should absolutely be the priority for repayment."

If you can't chip away at those debts faster by increasing your payments, then look into refinancing them at more affordable interest rates.

3. Scrutinize the “Schumer Box"

Named after Senator Charles Schumer, the Schumer Box is that little box on your monthly credit card statement that tells you the cost of using your credit card. It details the fees, annual percentage rate (APR) and terms of your credit card, making it easier for you to compare rates and fees from one card to the next.

By clarifying the cost of credit, the Schumer Box makes it easier for you to manage your credit card debts and see which ones you should prioritize in your repayment plans.

4. Check your credit utilization

Credit utilization is the percentage of credit you are using or have charged, versus the percentage of credit you have available. For example, if you have a card with a $5,000 credit limit and you have a $2,500 balance on the card, you have a 50 percent credit utilization rate. To maintain a high credit score, you should always keep your credit utilization below 25-30 percent.

Even better: pay off your balances in full each month, recommends Richard W. Paul, a Certified Financial Planner. “If you buy something on credit and you can't afford to pay the bill when it comes in, you can't afford it," Paul says.

The ultimate directive is to make sure you're not spending everything you're earning. You should have assets that you're carrying—not debt.

Certified Financial Planner Richard W. Paul

5. Calculate your debt to income ratio

Most lenders want you to keep your debts low, preferably under 43-45 percent of your net income. “People get duped into thinking that because they can acquire something they can afford it," Paul notes. “But it's a slippery slope and it's very easy to fall into the credit card trap if you're not careful. Then you're paying thousands of dollars in nondeductible interest and it just makes no sense."

6. Evaluate your debt trend

While it's important to keep track of where your debts stand at any given point in time, you should also evaluate your overall debt trend—how much debt you had last month, last year, and so on—and make sure it's headed in the right direction. Credit reports have started including this information, giving you and lenders a peek at your overall debt tendencies.

“If a trend shows you're increasing your spending frequency, your borrowing levels, or even opening several new accounts, that would come up as a red flag," says the NFCC's McClary. “You might be capable of managing those debts in the moment, but if the trend suggests an increase in multiple debts over a sustained period of time, it makes you look like more of a risk."

7. Create a repayment plan or get help making one

To reduce or completely eliminate your debts, you need a plan. Once you've knocked out higher rate, “bad" debt, then shift to medium term obligations like car notes or student loans, before getting aggressive about longer-term bills such as mortgages.

If you find it overwhelming to prioritize or make your own repayment plan, a certified non-profit credit counseling firm, like the member agencies of NFCC, can help by giving you one-on-one counseling and a personalized, step-by-step plan to pay off your debts. There are also free interactive calculators, tools and other support aids online at NFCC.org.

Whether you go it alone or get professional help with managing your debt, you must control your spending while implementing your payoff plan. “The ultimate directive is to make sure you're not spending everything you're earning," says Paul. “You must live within your means because you should have assets that you're carrying—not debt."

Lynnette Khalfani-Cox, The Money Coach, is a Chase News contributor. Her work has appeared in The Wall Street Journal and CNBC, among other media outlets.