How Much Debt Is Too Much, And What You Can Do About It

While it can be good to have some debt in your life, having too much can be a detriment to your personal finances. Your debt-to-income ratio, or DTI, provides a percentage of your monthly debt obligations that can tell you if you have too much debt. A DTI of 36% or less is considered good, while anything above 43% can be seen as “too much” debt.

This article will show you how to recognize how much debt is too much, and what you can do to improve your situation.

According to the Federal Reserve Bank of NY, total household debt in the U.S. rose by $394 billion (2.4%) to $16.90trillion in the fourth quarter of 2022.

That’s not necessarily bad, as there’s good debt and bad debt. Let’s take a look at what differentiates the two.

What Is Good Debt?

This debt can include mortgages, the largest chunk of debt owed by Americans. In general, mortgages are considered "good debt," or the type of debt that offers tax advantages, fulfills a need rather than a want and supports your ownership of an asset that increases, or appreciates, in value.

Of course, if your house is grander than the income that pays for it, you may be "house poor," which means there's not enough left over after your monthly mortgage payment to square away your other expenses.

Other types of good debt include student loans, business loans and – to the extent cars are necessary for reliable transportation – auto loans.

What Is Bad Debt?

“Bad debt” is, essentially, any accruing payments that you can't afford.

Taking "good debt" loans out of the equation still leaves Americans with a total credit card debt of $986 billion, surpassing the prepandemic record, and a total revolving home equity debt of $336 billion. If you're struggling to repay your credit, you know the sinking feeling of looking at a balance that's growing, even though you haven't made any new purchases.

Generally, having a diverse amount of good debt can be good for your credit score, as your credit mix makes up 10% of your FICO^® Score. Lenders like to see borrowers that can manage repayments on different types of debt, like installment and revolving accounts.

However, if your credit utilization is too high, you run the risk of lowering your credit score. By using too much of your available credit, you risk affecting your “amounts owed” and “payment history,” which make up 30% and 35% of your credit score, respectively. Owing too much in debt could lead to missed or late payments, thereby lowering your score.

If your credit score gets too low, you could have trouble qualifying for loans and good interest rates.

Experts recommend keeping your credit utilization at or under 30%.

The easiest way to know if you have too much debt is to calculate the income percent required to make your monthly debt payments, or your DTI.

As we mentioned up top, your DTI compares how much money you owe per month to how much money you earn per month. Figuring out your DTI isn’t as difficult as it may seem. Use the information below to calculate what your DTI is.

1. Add Up Your Fixed Monthly Debts

These expenses may include:

• Monthly rent or house payment
• Minimum monthly credit card payments
• Student, auto and other monthly loan payments
• Monthly alimony or child support payments
• Other debt

Some other payments, like groceries, utilities, gas and taxes are typically not included in the DTI calculation, but remember to take them into account when you're planning your monthly budget.

2. Divide By Your Gross Income (Income Before Taxes)

Sources of income can include:

• Wages
• Business profits
• Salaries
• Tips and bonuses
• Pension
• Social Security
• Child support and alimony

3. Convert Your Answer To A Percentage

The final result is your DTI.

Consider this example. Let's assume you pay rent at a monthly rate of $1,500, a car payment of $500 and a minimum credit card payment of $150. Let's also assume that you have a gross monthly income of $5,000. Your DTI is $2,150 divided by $5,000, which equals 43%.

Most financial experts will tell you that a DTI no greater than 36% is ideal, with no more than 28% going toward housing expenses. At 36%, borrowers will start feeling the pinch of increasing debt, and while they will still qualify for mortgages, they will begin to pay higher interest rates. At 43%, as discussed above, you'll have trouble getting mostmortgages. At 50%, you are in serious risk of defaulting on your mortgage.

A high DTI isn’t the only sign you’ve taken on too much debt. If you’re in any of the following situations, it might be time to get some help:

• You rarely have money in the days before payday and are cobbling together change to make it until your check is deposited.
• You use your credit card to make routine purchases and you are not paying the entire balance when you get your statement.
• Your debt isn't going down, and in some cases it's going up, because you're only able to make minimum payments on your credit card.
• Close to half of your monthly income goes to debt, and that amount seems to be increasing.
• You're unable to participate in your employer's retirement plan.
• You're unable to save any money for an emergency fund.

How Much Credit Card Debt Is Too Much?

Credit card debt is a problem for many of us. It can be disheartening to see your balance rise even when you're making minimum payments and cutting back on your purchases. Here are some common red flags indicating that your credit card debt is out of control:

• You can only make a minimum payment and you struggle to make it on time.
• You’re relying on credit cards to pay for essentials, but you aren't able to pay those charges off when the bill comes due.
• You’re shuffling credit balances from one card to another.

If any of these apply to you, consider taking steps to get out of credit card debt.

How Much Student Debt Is Too Much?

Many young professionals struggle to keep up with their student loan repayments, even after getting a job in their field. To ensure you don’t borrow more than you can afford to pay back, research starting salaries for your major and cap your loan at what you could make in your first year. If you think you’ll make $45,000 a year in your first entry-level job, then make that your borrowing limit.

Take steps to prepare financially after graduation for an easier time repaying your loans.

If your debt is becoming a detriment to your day-to-day life, you may want to take steps to better manage your finances and eventually pay off your debt. Consider the following debt management strategies.

Debt Consolidation Loans

Debt consolidation allows you to combine several payments into a single monthly payment at a lower interest rate. There are numerous options for debt consolidation loans, such as personal loans, that can help simplify your repayment process.

Debt Settlement Programs

You can work with a debt settlement company to possibly convince your lender to forgive a portion of your debt. There are certain risks involved, though, as debt settlement companies can charge high fees, and your credit score can take a hit during the process.

Credit Counseling

Working with a credit counselor can help you with your personal finances, such as planning a budget and managing your credit, and provide you with debt relief. Counseling is offered by some nonprofit agencies at no cost to you.

0% Balance Transfer Credit Cards

With a balance transfer, you can move the balance of one or more credit cards onto another card. Some lenders offer 0% APR introductory periods for new cards, meaning you could pay off your balance during that period interest-free. An introductory period may last up to 21 months before you’ll start owing interest on the card.

It’s important to understand if the debt you have is too much, and whether you have more “bad debt” than “good debt.” If your DTI shows you have more debt than you can handle, it may be time to consider a debt management strategy.

If you think you have too much debt on your hands, see how a debt consolidation loan could help you out.