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Based on Is rent considered a debt?

The question of:

What is your total monthly debt payment (e.g. student loans, vehicles, credit cards, personal loans, etc.)?

got me thinking.

If you rack up $500 every month and pay it off in full but have the option to just pay the minimum (let's say $25) then which monthly debt payment should you calculate?

MonkeyZeus
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    Note that for most financial instruments that let you borrow another $500 every month, the minimum repayment increases as your debt increases. So the $25 minimum you see on each month's bill isn't really a viable "monthly payment" because if you start paying that on a monthly basis it won't be long before it no longer covers the minimum. – Will Oct 17 '19 at 09:20
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    @Will Yes, that is fully assumed and understood but if at a singular point in time you have accrued $500 in charges and the minimum payment is $25 and you get asked this question then what do you use as the answer? – MonkeyZeus Oct 17 '19 at 12:22
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    the debt only exists, as you've acknowledged, for that singular point in time. There's nothing monthly about the costs of that individual debt, so it shouldn't contribute to your estimate of total monthly debt payments. – Will Oct 17 '19 at 14:12
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    One bit of logic that might help would be the think that CC charges do not become a debt until they have been on the card for a month. So it you are charging $500 and paying off $500 every month, there is no debt. You are just trying to earn miles or something. There are lots of "well actually" things to say about that, I know. – Ukko Oct 17 '19 at 18:13
  • In Norway, unused credit is now counted as debt. Meaning, 5 1000$ credit cards would count as a constant debt of 5000$ when you apply for loans, even if you don't use them. – Daniel Vestøl Oct 18 '19 at 13:40
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    @DanielVestøl Wow, I would be in "cc debt" for at least 60k in Norway. – MonkeyZeus Oct 18 '19 at 17:21

8 Answers8

16

You asked,

then which monthly debt payment should you calculate?

I think the only legitimate answer to this question is, "it depends" (on the context). Why are you doing this calculation and what else is involved?

Generally, in a financial sense, debt means money a borrower owes a lender - it's a deferred payment, usually including interest, for some value (usually money, i.e. a loan) that the lender has already provided the borrower. So, in the strictest technical sense of the definition, every dollar that goes through the credit card is "debt." However, if you're asking about debt in a specific context, the answer may vary slightly.

But that doesn't automatically mean that all the money you owe, or all money you spend, is debt. In your example, if you're asking from a personal budgetary perspective, if you're "racking up" $500 every month on a credit card and always immediately paying it back, in the grand scheme, you're essentially just pumping regular expenses through a very short term loan. It's probably even an interest-free loan if you're paying it back quickly enough. From a budgeting perspective, many people would not consider that debt, but would account for that monthly $500 as an operating expense - with the differentiating factor being that "debt" means "things you're paying interest on" - which is an important differentiation from a personal budgeting perspective, since most people doing budgeting have a goal of paying as little interest as possible. So, defining debt as "things I'm paying interest on" helps filter out the white noise of using a credit card as an interest-free tool for deferring payment on regular expenses from cases where you're incurring true debt that you'll have to pay interest for.

Meanwhile, from a credit reporting perspective, the thing that matters is what your credit card issuer reports to the credit bureaus each month - which will be the balance on the card on that day, and whatever your minimum payment is. Depending on the rhythm of when you rack up that $500 balance through the month, when you pay it back, when your statement is generated, and when the bank reports to the bureaus, the balance reported may or may not actually represent that total $500 amount - it will likely be less than that.

Finally, from a debt load calculation perspective - i.e. a new lender trying to determine your DTI as part of you applying for a new loan - the thing that matters is the minimum required payment that was reported on your most recent credit report. In your scenario, a lender trying to determine your eligibility for a new loan would consider your monthly debt load to be $25.

So, depending on the context, you may get a slightly different answer to your question.

dwizum
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    Thanks, I edited to make that sentence bold, and made some other minor changes for readability. – dwizum Oct 16 '19 at 15:00
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    I wouldn't say that debt requires interest payments.... I have a maxed out credit card that charges no interest in the first 15 months, I would consider that debt, I'm making the minimum payment on that. I also have hundreds of dollars of balance on credit cards that I pay off every month, I would not consider that debt. – xyious Oct 16 '19 at 16:02
  • TL;DR the minimum payment amount required by the lender is the monthly payment amount considered for credit purposes. –  Oct 17 '19 at 01:34
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    [In a financial sense] That doesn't automatically mean that all the money you owe, or all money you spend, is debt The definition of debt is pretty much what you owe other people, earning interest or not. The credit card "loan" that you pay at the end of the month is debt, although a short term one. – SJuan76 Oct 17 '19 at 07:37
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    the white noise of using a credit card — why white? It wouldn't have a constant PSD? – gerrit Oct 17 '19 at 08:21
  • I made more edits to clarify the "strict" definition vs definitions in other contexts, since my budget-oriented statement about "paying interest" seems to have attracted so much attention. – dwizum Oct 17 '19 at 13:29
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    @gerrit It's noise from the perspective of a budgeting tool which would tell you that CC "debt" is a problem. But it's not a problem to use a credit card if you're always paying the full balance before the balance due date. Like if you write a check, technically between the time you wrote it and the time it is cashed you have money in your account that belongs to someone else. But if you have sufficient funds and keep your register balanced, then writing a check is not a problem. – user3067860 Oct 17 '19 at 15:38
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    @user3067860 I can see that it's noise, but I don't understand why it's white noise; I haven't done the maths but I'd expect it to be better modeled by some other colour of noise (I would suspect it's pink or brown noise instead). But I've never listened to my credit card bills :) – gerrit Oct 17 '19 at 15:47
  • If we map power to dollars, you're probably right. The most frequent transactions are smaller amounts. But I doubt it's as predictable relationship as any actual noise color. I have access to a few billion credit card transactions, I guess I just need to figure out how to listen to them! – dwizum Oct 17 '19 at 17:02
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    +1 to @gerrit from someone who programs RF receivers. :) – reirab Oct 17 '19 at 18:37
  • I have somewhere in the region of £5000 of interest free overdraft available to me - if I maxed all my bank accounts that would definitely be debt... – Tim Oct 17 '19 at 19:11
  • I would agree with that. – dwizum Oct 17 '19 at 19:33
  • @user3067860 technically, wouldn't it be the person collecting on the check that would be in debt until the check is verified? – Daniel Vestøl Oct 18 '19 at 13:42
  • @DanielVestøl I was thinking about the time after A hands the check to B, while the check is sitting in B's pocket--at that point A is "in debt" to B. But sure, after B deposits the check, B could even be in debt to the bank in a crazy way--if it turns out that the check was bad, the money will disappear. Hopefully B hasn't fallen for some scam where they return part of the money to A... – user3067860 Oct 18 '19 at 13:48
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which monthly debt payment should you calculate?

Since you are treating the CC as "slightly deferred spending" instead of "borrowing", I would not consider that as a debt payment.

(Note that I payoff my CC at end of month, not on the due date, because it's paying current spending. This simplifies my budget.)

RonJohn
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  • Agreed. I would not include monthly spending that happens to be on a credit card, but which is paid off every month in this figure. There is no financial difference between making these purchases with cash, check, or debit card vs. making them with a credit card (other than that you can get cash back or points with the latter, but typically not the former.) That's almost certainly not what someone asking what your total monthly debt payment is asking about. Of course, if you're actually carrying a balance on a credit card that you're paying off, then they would indeed be interested in that. – reirab Oct 17 '19 at 17:56
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Rent is a living expense, not a debt.

"Monthly debt" is a contradiction in terms.

Living expenses is the right word for new expenses that crop up every month, like the cable bill.

Debt is the total amount you owe, and it is not time-related; it's not a rate, so it can't be "monthly". Paying that large amount would instantly end the debt.

"Monthly debt payments" is not a correct term for living expenses you place on a card and pay off in full every month. It may be tehnically debt, but it doesn't work like debt; it works like living expenses because it wouldn't really affect your financial picture if you just paid cash. When a financial advisor asks about monthly debt payments, they don't mean this. And you shouldn't conceal expenses from an advisor by charging them to a card and then calling them "debt". You should report "$40 dinner out, $20 movie tickets" as living expenses (and then, don't double-report them again as a $60 debt paydown. They're only an outlay once, make sense?)

Businesses call this a "short term payable" and treat it differently than long term debt. It's viewed almost like check float, back when checks were mailed and interchanged on paper.

"Monthly debt payments" are the periodic payments you make to settle long-term debt in installments. They have two parts:

  • Interest, which is the rental fee you are paying for borrowing the money
  • Principal reduction, which reduces the debt itself.

Generally when dealing with lightweight consumer finance analysis, they are mostly interested in your cash flow. So all they care about is the "monthly payment", which includes principal and interest.

If they are doing a more sophisticated analysis, as in a P/L and Balance Sheet, they care about the difference between interest and principal, because interest is a true expense (money gone byebye), and principal is ... Weird.

If you want to get into the gory details of that, the "living expense" of a credit purchase occurs on the date you buy the meal, movie ticket, whatever. The unpaid CC bill becomes debt, and when you move $500 from savings to credit card payoff, that's considerd a wash - you have $500 less savings but also have $500 less debt, so these cancel out! The income statement shows numbers canceling, the P/L doesn't even show it. The only place it's important is on the Cash Flow statement.

Community
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Harper - Reinstate Monica
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  • "Monthly debt" is a viable term when "you rack up $500 every month and pay it off in full". IOW, you accumulate it over one month, and then immediately pay it off. – RonJohn Oct 16 '19 at 23:10
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    @RonJohn it's as viable as 120 volts of power, 1500 watts per second, or 256 GB/sec SSD. We know what you mean, but it makes experts cringe. – Harper - Reinstate Monica Oct 16 '19 at 23:16
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    It's only contradictory when you read it as a "monthly debt payment", and not a "monthly debt payment" which is what prospective creditors want to know about to understand cash flow and affordability. From that perspective, $500 borrowed and repaid every month should only register as a debt payment if you are also registering the initial borrowing as $500 a month of additional income. – Will Oct 17 '19 at 09:11
  • @Will Good point. I see what you mean about the emphasis, and I've edited to address that. I never thought of debting as income, but true; it is treated as such if you default. – Harper - Reinstate Monica Oct 17 '19 at 15:29
  • I'm not clear on what you mean by including 256 GB/sec. Are you criticizing the units, or the amount? Read speed is a completely legitimate statistic for a hard drive, but 256 GB/sec is absurdly high. – Acccumulation Oct 19 '19 at 03:43
  • @Acccumulation good point. Not an ideal choice. – Harper - Reinstate Monica Oct 19 '19 at 03:51
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    When I think of ugly units, the first thing that comes to mind is kWh/year. What an abomination. – Acccumulation Oct 19 '19 at 03:55
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I can understand the spirit of the other answers that are drawing a distinction between money that's accruing interest and money that's not. You swipe your card, your bank pays the merchant $25, the merchant gives you lunch, you owe your bank $25. That's a $25 debt. If your bank gives you a generous grace period before charging interest, that's fine, but you have a debt of $25 to the bank. By any reasonable definition of the word debt, that's a debt.

If this is an effort you're making to arrange your own budgeting to prioritize your own debt repayments to minimize your interest expenses, then sure you can take some liberties about which debts to prioritize. But money you owe someone else is debt even if the lender isn't yet charging you interest on your debt. Money owed is debt.

And yes, in accounting there are differences between long term and short term debts and short term portions due of long term debt. But the common thread in all of that is the fact that it's a debt. Credit card debt within the grace period and not yet accruing interest charges and debt accruing interest charges are both debt.

When you go seek more debt underwriters will ask for information surrounding your existing debt and your income. Generally, housing is separate from consumer debt like credit cards and car loans. The underwriter wants to know your minimum required payments to understand your ongoing obligations compared to your income. So your credit card debt maintenance is the monthly interest charge plus 1% of principal thanks to the CARD act. Different underwriters will have different criteria, but the goal is to understand your ability to absorb another obligation.

This is not the same as the rent question. And I disagree to the answers to some extent as to whether or not rent is a debt because it would depend on the lease agreement. When you rent something you are agreeing to pay for the use of a thing for a period of time; failure to pay would be a breach of contract. In the case of a credit card, the bank lent you $25 to buy lunch.

quid
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It sounds like really the only reason you're finding the question posed

What is your total monthly debt payment (e.g. student loans, vehicles, credit cards, personal loans, etc.)?

confusing is revealed in the phrasing of this question's title,

Would the minimum payment or full CC amount be considered monthly debt?

The financial assessment is not asking for a "total of payments relating to monthly debt". It is asking for a monthly total of payments relating to debt. "Monthly debt" on its own doesn't accurately describe a specific quantity you should be seeking to estimate.

If a debt you currently have has no monthly costs because it will be settled within less than a month, you can straightforwardly omit that from your total of monthly debt payments. It would not help give a clearer view of your finances to do otherwise.

Will
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When you are asked that question (for example by a potential lender), they want you to use the minimum credit card payment amount.

For example:

How to Calculate Debt-to-Income Ratio (DTI Ratio):

Credit card payments (use the minimum monthly payment amounts not what you actually pay)

How to Calculate Your Debt-to-Income Ratio (and What It Means):

... minimum credit card payment...

DavePhD
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The assessment is trying to get a picture of your cash flow, broken down into different categories. For this purpose, the actual amount that you're paying is what's relevant. The fact that the credit card company will accept less without penalizing you (except for interest) doesn't really matter, in my opinion.

However, there's a possibility that this could cause the same expenses to be counted twice. If the assessment also asks your food budget, and you usually pay for groceries using a credit card, they'll show up twice. If any of the expenses in other questions are normally paid by credit card, you should probably subtract them from this response.

However, if the assesssment is just getting the big picture of your finances, it's likely that these small amounts won't make much difference. Credit card debt doesn't usually become an issue unless you let balances accrue and it builds up to thousands of dollars, with interest also mounting up.

In no case, though, is just the minimum payment a useful answer to the question, unless that's all you're paying.

Barmar
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  • If you're paying the balance of in full each month, the amount they're interested in is neither the amount you're paying nor the minimum payment, but rather zero. That you're charging the expenses to a CC and then paying them off within a month instead of charging them to a debit card or writing a check is completely irrelevant for getting an idea of your monthly cash flow. Of course, amounts you're paying to pay off CC debts on charges incurred on prior statements should be included. – reirab Oct 17 '19 at 18:25
  • @reirab That's the point I was making about avoiding double counting. You could do it the other way -- include your food expenses in the debt category and say you spend $0 on groceries. – Barmar Oct 17 '19 at 18:40
  • You could, but that would lead likely lead to confusion. It's going to (rightfully) raise a lot more red flags if you say you spend nothing on food, for example. The key is that the question asking about monthly debt payments is simply not asking about what you're spending on monthly purchases at all. There may be a separate question asking about that, but that one is asking about debts you've incurred in the past that you're paying off over time, not your normal monthly purchases. – reirab Oct 17 '19 at 18:46
  • Now I'm wondering about the point of that question at all. What do mortgages, car loans, credit cards, and student loans have in common other than that they accrue interest over time? A better question would be your debt servicing expenses (interest and late fees), or your total debt. The principle payments should be part of the budget for home ownership, car ownership, etc. – Barmar Oct 17 '19 at 18:57
  • They're just wanting to know how much of your monthly income is already going to paying off existing debt. Obviously, it's a very different situation to the lender if all of your monthly income is available for monthly expenses and new debt payments vs. if 50% of your monthly income is already going to servicing existing debt. – reirab Oct 17 '19 at 19:00
  • @Barmar "What do mortgages, car loans, credit cards, and student loans have in common other than that they accrue interest over time?" - the fact that they create an obligation to make a series of payments in the future which will reduce your available free cashflow. – Stobor Oct 17 '19 at 22:36
  • @Barmar and why do they ask about the repayment, not the total debt? Because having $100,000 owing on a home loan with 20 years remaining will have a different minimum monthly repayment than $100,000 owing on a car loan with 5 years remaining. – Stobor Oct 17 '19 at 22:39
  • @Stobor But the question doesn't ask about the debt, it asks how much you're repaying each month. It doesn't distinguish between $100/mo on a car loan and $100/mo on a mortgage, since it doesn't ask about the loan period, interest rate, etc. It's conflating so many things. – Barmar Oct 17 '19 at 23:40
  • @Barmar - correct, the thing that the cashflow assessment is trying to figure out is how much of your income is already committed to something else. The questions are specifically about how much the repayments on the debt are, not the amount of the debt, because the repayments are what come out of your income. That's also why as some of the other answers point out, only the minimum repayment is relevant, as that's the amount that is committed to. – Stobor Oct 18 '19 at 00:15
  • @Stobor OTOH, credit card payments tend to be extremely variable (my Amex bill varies from a few hundred to a few thousand, depending on whether I took a trip that month). Probably only long-term debt is really important. – Barmar Oct 18 '19 at 00:16
  • @Barmar - Yes - again, minimum repayments are relevant here. The outstanding balance on your credit card is not relevant, the minimum monthly repayment is. And yes, if you generally pay your credit card off in full, the lender will generally take that into account differently from their normal "payments on debt". – Stobor Oct 18 '19 at 00:21
  • @Stobor Maybe I'm out of touch, since I always pay in full, my minimums are something like $25, which is in the noise of my budget. – Barmar Oct 18 '19 at 00:22
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Anything you pay off as soon as it's due is not debt.

For example, if the full amount is due within 30 days -- or your rent is due within 3 days of the first of the month, it's not debt if you pay it within those deadlines. Whatever balance you do not pay in the time allowed for full payment is debt, including future installments on any purchase not paid by the full payment date.

Your monthly debt payment is the monthly total of all payments described in the previous sentence. Presumably, you are going to continue to pay the minimum due each month, and this takes away from "spendable funds" in the present.

All of which ignores any debts which might be paid off soon (which would decrease the total monthly burden) or any new installment purchases (which would increase it). But the assumption is that if you do want to take any new debt later, the credit department there would want fresh figures, and make their determination based on those.

And this is a little bit off the topic, but it deserves to be said again and again: if you are buying real estate, and you also want to buy furniture and such on credit, wait for closing first, then buy the furniture. You don't want your mortgage company to pull another credit report and say, "your credit was fine then, but now you have more debt and you no longer qualify for a mortgage".

Jennifer
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