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How Much Debt is Too Much?

David Cole Updated: June 26, 2023 • 10 min read

How do you know if you are carrying too much debt? Of course, you can do the math. Although, just looking at your numbers does not mean that you are convinced you are carrying too much debt. In order for you to figure out whether you're in too much debt, try and answer the following questions:

  • Do you find yourself worrying that you will have enough money to pay next week’s bills?
  • Do you have no savings to fall back on in case of an interruption of income?
  • When buying gas or groceries, do you tense up wondering if your debit card will be declined or not?
  • Been losing sleep wondering if you will have enough income to cover your minimum bill payments?
  • Feel discouraged because you can’t purchase higher-cost items that would make your life more enjoyable?

If you find yourself struggling, well, you’re not alone!

According to one study (Experian), as of September 2021, combined personal debt for the US was pegged at $14.96 trillion. The average American has debt that is reported to the credit bureaus amounting to $92,727, and the type of debt average was:

  • Credit card(s) $5,315
  • Personal loan(s) $16,458
  • Auto loan(s) $19,703
  • Student loan $38,792
  • HELOC $41,954
  • Mortgage $208,185

If you are wondering, do I have too much debt? Then you can also see where you stand with a debt-to-income ratio. DTI is a popular benchmark used to forecast your ability to produce enough cash to cover your debt (including lease) payments.

The danger zone begins when you have a DTI of 40% or more of your gross income. If your dream is buying your first house, most lenders will require a ratio BELOW 36%.

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Understanding your Debt-to-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is the percentage of your monthly gross income that you have to use towards paying your debts. A DTI of 36% or more can affect your ability to obtain a mortgage or finance a car. It’s relatively straightforward to calculate your DTI. To figure out your DTI, you do not need to include payments for monthly living expenses such as; groceries, gas, utilities, car or health insurance, or any other costs that do not require financing.

How much debt is OK?

Your debt-to-income ratio (DTI) is the percentage of your monthly gross income that you have to use towards paying your debts. A DTI of 36% or more can affect your ability to obtain a mortgage or finance a car. It's relatively straightforward to calculate your DTI. To figure out your DTI, you do not need to include payments for monthly living expenses such as; groceries, gas, utilities, car or health insurance, or any other costs that do not require financing.

The answer to this question isn't that cut and dried. Instead, it's unique to each person. Unfortunately, our "easy credit", "buy it now" society has weighted many individuals' debt load towards consumer items. Cars, electronics, boats, ATVs, and vacations all create an excessive amount of consumer debt which is bad debt. Not that these things are bad in themselves, but when a large percentage of your income is being consumed to make the payments to support extra recreational toys, then these can get in the way of taking on good debt like a mortgage.

If buying a home is your goal, you need to think like a lender. They base their decisions on your income, debt load, and credit scores. Your goal is to align that data with what a lender is looking for, and the effort will undoubtedly be worth it.

First, you need to look at your numbers to see where you stand (online debt calculators can assist you in figuring out that information).

  • What is your annual income?
  • How much do you have in consumer debt vs. mortgage debt?
  • Are you mainly using credit cards to finance consumer purchases?
  • What are the interest rates assessed on each account?
  • What are your overarching plans/goals that too much debt can affect adversely?

Debt to Income calculation

Here's how one can go about calculating their debt to income ratio:

  1. Make a list of all of your current ongoing bills, for example, Rent or mortgage, car payment(s), student loan payment, Alimony or child support, minimum credit card payments, personal loan payment, etc. Basically, anything that would show up on your credit reports.
  2. Now divide your total monthly debt payment amount by your gross monthly income and multiply the answer by 100.


Scarlett pays monthly bills totaling $1,650, and her gross monthly income is $4,800 mo.

$1,650 / $4,000 = .0343 X 100 = 34.37%. In this example, Scarlett is just under a 36% DTI, and if her credit scores are also healthy, she is in a good position to apply for a mortgage.

Understanding Debt to Income Ratio


Good Debt and Bad Debt: Knowing the difference

When you're thinking about your finances, it's essential to understand the difference between good debt and bad debt. Good debt is money that you borrow for something that will increase in value over time, like a house or a college education. Bad debt is money you borrow for something that will not increase in value, like a car or credit card purchase. Knowing the difference between good and bad debt can help you make better financial decisions and manage your debt for your benefit.

Signs that you have too much debt

The most common warning sign is making the minimum payment on your credit cards. Perhaps even struggling to make the payment(s) and then racking up late payment fees. Even if you can afford the minimums on all your accounts, you could still be in trouble—what happens if there is an unexpected expense such as a car repair or an accident and you can't work for a few weeks?

We're all familiar with the panic that sets in when we realize we've missed a payment. This is incredibly frustrating when we've let it happen because we didn't have enough money on hand to cover our expenses. A solution for this is to keep an emergency fund—a small amount of cash set aside for just these occasions.

You are in debt trouble if:

  • Your bank account is usually pushing zero, and you find yourself being dinged with nonsufficient funds fees.
  • Your consumer debt payments equal 50% or more of your income.
  • Even in months when you can make all of your payments, you are not left with any money for fun.
  • You cringe when using your bank account debit card to buy groceries, hoping it won't be declined.
  • Your credit cards are maxed out, and you are being charged late payment penalty fees even trying to pay the minimum on time.
  • You don't have a savings account or any other emergency funds set aside.
  • Creditors call you demanding payment, or worse yet, some accounts have been turned over to a collection company.

The worst kind of bad debt: Toxic Debt

An entire industry takes advantage of people who find themselves in severe financial straits. This type of debt is designed to strip you of as much money as they legally can. Interest rates of 36% and higher are the norm. Car title loans are perhaps the most dangerous as you are gambling on your means of transportation.

  • Payday loans
  • Car title loans
  • No credit check loans

Specific Debt Type Guidelines

You only make so much money. It follows then that you need to be smart about using that money to reach your goals. One planning technique recommends that you list your most important goals first and then the rest in descending order of importance.


  • Save money for a down payment on a house.
  • Qualify to purchase your first home by paying off some bad debt to raise my credit scores.
  • Maximize contributions to your retirement account.
  • Pay extra every month on your student loan to reduce the balance.
  • Plan on keeping your car for at least six years.

Doing this and sticking to it requires personal self-discipline. Keep your eyes on whatever your most important goals are, and looking back; you will be delighted to see how far you have come!

Mortgage Debt:

This should not exceed 36% of your monthly income. Keep in mind that you will also need to set aside money to pay real estate taxes.

Student Debt:

This is a risk vs. reward situation. A good rule of thumb is to limit the gross amount you borrow to the amount you expect to earn during one year in your new profession. So if you determine that your annual salary will be $60,000, then only borrow $15,000 per year over four years. Many consider student debt to be good debt because you will be securing a higher-paid profession. Still, it is so easy to overborrow, and doing so would tip student debt into the bad debt category. Another common-sense suggestion is to keep the payments at no more than ten percent of your take-home pay.

Car Loan Debt:

The price of autos has skyrocketed due to computer chip shortages and other supply chain issues. Your goal is to keep car loans, and associated expenses should not exceed twenty percent of your net take-home pay.

Medical Loan Debt:

Most Doctors and Hospitals will extend zero interest terms to assist in paying off the balances. Here is the challenge: the fees charged for procedures, lab tests, and prescriptions are beyond the ridiculous, making the amount of debt unmanageable.

A general rule of thumb: Use the debt-to-income ratio guideline of keeping your total debt payments at or below 36%.

What to do about it? If your debt is creeping up into the low 40% range, implement a proven debt reduction method as discussed below. Once you are in the range of 50% or more, you need professional help and may need to seek legal relief.

How much debt is too much to buy a house?

If you're in the market for a new home, you'll want to pay close attention to your debt-to-income ratio. Lenders use this critical number to determine how much of a mortgage you can afford, and it's calculated by taking your monthly debt obligations and dividing them by your gross monthly income.

For example, if you have monthly debts of $1,500 and a gross monthly income of $5,000, your debt-to-income ratio would be 30 percent. Most lenders prefer to see a debt-to-income ratio below 36 percent, so in this case, you would be in good shape. However, if your debt-to-income ratio is above 43 percent, getting approved for a mortgage may be challenging. So if you're looking to buy a new home, make sure to keep your debt-to-income ratio in mind.

How much credit card debt is too much?

It's no secret that credit card debt can be a serious problem. If you're not careful, it can spiral out of control, which leads to mounting interest payments and a growing balance that seems impossible to repay. So how can you tell if you're carrying too much credit card debt?

There's no hard and fast rule, but experts generally recommend keeping your credit card debt at or below 30% of your total credit limit. So, for example, if your credit limit is $1000, you should aim to keep your balance at or below $300. Doing so will help you live within your means and avoid paying excessive interest charges.

Of course, there are always exceptions to the rule. If you have a particularly low-interest rate or can make large payments each month, you may be able to carry a higher balance without getting into financial trouble. Ultimately, it's essential to use your best judgment and make sure you're comfortable with the amount of debt you're carrying.

What to do if you have too much debt?

If you find yourself dealing with too much debt, there are several things that you can do to get back on track. First and foremost, it is essential to take an honest look at your finances and determine which debts are most urgent or pressing. Some obligations may be more important than others, such as credit card debt or medical bills. Once you have identified the most pressing debts, you can begin working on a plan for tackling them.

  • Negotiate with your creditors to reduce interest rates or payments.
  • Adjust your budget to free up extra funds for debt repayment.
  • Seek out a professional debt counseling service.

Getting Started With Debt Consolidation

When it comes to paying off your debt, several different options are available. Some people opt for the "snowball" method, where you focus on chipping away at smaller debts first, while others prefer to attack larger, more intimidating balances. Another popular debt payoff strategy is known as the "avalanche" approach, which first involves tackling debt with the highest interest rates.

Each of these methods has its pros and cons, and ultimately the best way to pay off your debts will depend on your financial situation and goals. It is vital to explore all possible options before committing to a specific approach to find the one that will work best for you. Why do some research and figure out how to get yourself out of debt once and for all?

Here is something you should check out. The 50/30/20 method is a simple but very effective budget strategy that lets you live your life comfortably while making steady progress in shrinking your debt load.

50/30/20 Budgeting Method

Ultimately, the key to getting out of debt is taking action and never giving up, no matter how daunting your financial situation might seem. With a little hard work and determination, you can regain control over your finances and place yourself on the path toward a brighter financial future.

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Written by David Cole

For over 17 years, Dave has been a financial business coach, teaching owners how to succeed in the digital economy. He is also an in-demand speaker for webinars and live events covering various business topics dealing with Internet marketing. Dave is also the author of a course on using LinkedIn to find your ideal prospects. He is an avid outdoor photographer and hiking enthusiast living in the desert southwest.