How much debt is too much?

We all want to make the best decisions when it comes to balancing our money and our lifestyle. Questioning your debt is healthy. 

It’s natural to worry about what you owe, and it’s not that hard to assess your debt level. Give yourself a few minutes to work through this simple process. Then you can decide if there’s room in your financial life to take on more debt, or if you should focus on bringing your debt down. 

What amount of debt is too much?

The answer to this question depends on your goals. If you’re trying to buy a house, for instance, you’ll need to keep your debt low enough to qualify for a mortgage. But if you’re starting a new business, you may have to live temporarily with higher debt until your income catches up to your startup costs. 

The bottom line: if your debt is keeping you from doing things you want or need to do, it may be too high.

If you’re wondering how much debt is “officially” too much (i.e., too much according to creditors), you can figure that out by learning how to calculate your debt-to-income ratio, or DTI. Here’s how.

How much debt do you have?

First, make a list of your debts. Include the interest rate, payment, and balances. Divide your accounts into these categories: 

• Short-term, high-interest loans like check advances, payday loans, and auto title loans

• Unsecured debt like credit card accounts, unsecured personal loans, medical bills, and student loans 

• Secured debt like mortgages and car loans. Rent is included in this category if you don’t have a mortgage.

• Court-ordered payments like child support or alimony

You’ll use these categories later when determining how to best budget for repayment. 

Tally up the total.

You can find your current balances by checking your credit report, verifying your accounts online, or looking at your last statements. 

Signs that your debt may be too high

Once you have your list of debts and your debt totals, it’s time to think like a lender and calculate your DTI. All you need to do is divide your total monthly debt payment (including housing) by your total monthly gross (before tax) income. 

For the example above, if your income is $6,000, the calculation looks like this:

$3,000 / $6,000 = 50%

A DTI of 50% is on the high side. The other 50% has to cover income taxes, groceries, utilities, transportation, clothing, your kids’ gymnastics classes, haircuts, travel, savings, retirement, the occasional burrito, and all the other expenses in life.

That said, a 50% DTI is survivable, especially if you’re in debt-payoff mode and you know your monthly expenses are going to go down as you start getting rid of your debts. If you’re shopping for a loan, a 50% DTI by itself shouldn’t get you a denial. But the lender will want a closer look at your credit standing and the other details of your financial situation.

A great benchmark is 36% or lower. That’s the DTI most lenders consider to be ideal, and one that shows you can afford your debts on the money you make.

What if my DTI is good?

DTI doesn’t tell you everything. Lots of life’s costs don’t show up in a DTI but could affect your comfort level with debt. You might have an expensive hobby. Tithing to your church may be a priority. Or you may be trying to save money to start a business, retire comfortably, or send your kids to college. 

So even if your debt is okay with a lender, it might not be okay with you. 

In addition, DTI doesn’t consider the amount of debt you have, only your payments. Credit card companies set minimum payments low, which makes it easier to carry more debt. Auto dealers offer 10-year car loans, which makes it easier to buy a more expensive vehicle. On paper you may be able to add a lot more debt, but in real life, you might not want to. Even with a good DTI, you may still want to bring your debt down.  

Strategies for bringing your debt down 

If debt is keeping you from accomplishing your goals or making you uncomfortable, create a plan to bring it down. First, make a budget if you don’t already have one. List every expense you pay. Then, look for opportunities to spend less, and direct those extra dollars toward debt repayment. Here are a few pro tips:

• Kick off your plan by selling things you don’t need. Throwing a chunk of money at a debt can be very motivating. 

• Court-ordered payments can sometimes be adjusted if you can show good reason. 

• Short-term loans (payday, check advance, or auto title loans) are a threat to your financial well-being. Make them your priority and pay them off like your life depends on it.

• Check into refinancing or consolidating your debts to lower your interest rate. Take the money you save and push it toward repaying debt faster. 

• You may be able to consolidate your federal student loans or get on an income-driven repayment plan to lower your monthly payments. That could free up cash to pay down more expensive debts. If you have private student loans, talk to your lender about consolidation options.  

• Involve your whole family in the planning so everyone can come up with ideas for saving money. 

• Join Buy Nothing clubs or other budgeting support groups to get motivation when you need it. 

• Lock your credit cards so they can’t be used before you take the time to unlock them. That extra step could help you spend less. Avoid one-click shopping sites.

• Hang out with frugal friends to avoid financial/social pressure. Not sure which friends are frugal? Financial awareness is a thing, even if you aren’t aware of who’s doing it. Once you mention your desire to cut expenses and reach a goal, like-minded pals are bound to speak up.

• Talk to a debt expert if you’re struggling. If you’re experiencing a financial hardship and can’t afford to fully repay your debts, your creditors may be willing to negotiate.

Finally, strategize which debts to pay off first. Use the debt avalanche method and choose the most expensive debt, or the debt snowball method and choose the debt you can pay off fastest. It doesn’t matter much. Make an extra payment toward your ugliest debt every month. The deeper your spending cuts, the sooner you’ll be rid of your debt. And the sooner you can celebrate. 

What’s next

• Tally your debts and calculate your DTI.

• Make a plan to clear debt. 

• Get guidance if you’re not sure how to figure it all out.