How Much Debt Is Too Much?



How Much Is Considered a Lot of Debt?

One good benchmark to use to help evaluate your current level of consumer debt — which includes credit card debt, student loans, car loans, personal loans and mortgage debt — is your debt-to-income (DTI) ratio. To calculate your DTI ratio, add up all of your monthly debt payments and divide them by your gross (pre-tax) monthly income. For example, if your total monthly debt is $1,000, and you earn $5,000 in gross income each month, then your DTI ratio would be $1,000/$5,000 or 20%. According to Experian, research indicates that borrowers with higher DTI ratios run a greater risk of not being able to make their monthly debt payments. Generally speaking, most mortgage lenders use a 43% DTI ratio as a maximum for borrowers. If you have a DTI ratio higher than 43%, you probably are carrying too much debt because you are less likely to qualify for a mortgage loan. So if your monthly debt payment is $2,250 with a gross monthly income of $5,000, your DTI ratio would be 45%, which indicates you have a relatively high amount of debt. 

Good Debt vs. Bad Debt

What’s the difference between good and bad debt? Good debt is a long-term investment in your future and puts you in a stronger financial position down the road, like having a home mortgage. Most people can’t afford to pay cash for a $200,000 house, which is why mortgage loans exist; plus, they make good financial sense. You can save for a house down payment of 20% ($40,000) and then take out a 30-year mortgage for the remaining 80% ($160,000). By assuming this debt, you have 30 years to pay back your mortgage, can deduct your mortgage interest from your federal taxes each year, assuming you itemize your taxes, and build equity in your home over time. At the end of this 30-year period, if your house appreciates 50%, the value of your home would grow to $300,000. This is considered good debt. After 30 years, you come out financially ahead.

Bad debt, on the other hand, involves borrowing money without building any equity over time and places you in a weaker financial position, like using your credit card to pay for routine living expenses. Let’s say you use your credit card to pay for $1,000 worth of living expenses each month. After one year, you have gone $12,000 in debt and could be paying as much as 18% or 20% in interest on your balance. Credit card interest rates are much higher than mortgage interest rates because credit card debt is unsecured. If you default on your credit card, the issuer has no collateral to sell to recoup the financial loss (making it riskier for the credit card company), whereas a mortgage lender can foreclose on your home if you stop making payments and resell your home. High credit card debt also may damage your credit and take you many years to pay off. When you finally zero your credit card debt, you have not appreciated any assets – and your bad debt has left you in a worse financial position.

Learn more about good and bad debt and how to develop a sound debt management strategy

How Much Credit Card Debt Is Too Much?

How can you determine if your current level of credit card debt is too much? Another helpful financial gauge used to monitor credit card debt is your credit utilization ratio, which is the percentage of credit you are currently using compared to the total credit you have available (referred to as revolving credit). Let’s say you have three credit cards with $10,000, $8,000 and $7,000 credit lines, respectively — for a total of $25,000. Your total credit card debt is $10,000, which means you are utilizing 40% ($10,000/$25,000) of your available credit. According to CNBC, it’s commonly recommended to keep your credit utilization ratio below 30% so you can maintain a higher credit score to get better terms and interest rates on loans and other credit cards. With this in mind, a 40% credit utilization ratio could be a good indication that you may have too much credit card debt. If your credit utilization ratio is high, you probably have a high DTI ratio, too — another warning sign that your credit card debt may be excessive. Other indications that you might have too much credit card debt include paying off your credit card debt using other credit cards, paying only minimum payments on your balances, not being able to save up an emergency fund and being denied for new credit.

What Happens If You Have Too Much Debt?

Having too much debt can have some serious consequences, which may interfere with your ability to achieve your financial goals in life. A large amount of debt can have a negative effect on your ability to secure other kinds of loans. For instance, excess credit card debt may impede getting the best terms and interest rates for a home mortgage or automobile loan. When you carry too much debt, your credit score is negatively affected. Your FICO® score, a specific brand of credit score created by the Fair Isaac Corporation, is a three-digit number between 300 and 850 based on information provided through your credit reports. It is calculated using your credit data across five different categories with various weights:

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • New credit – 10%
  • Credit mix – 10%

Using too much of your available credit (i.e., having a high credit utilization ratio) affects the amounts owed category (30%), and late payments affect your payment history category (35%), which when combined account for 65% of your FICO score. A lower FICO score can translate into less competitive interest rates and less favorable loan terms offered to you by various creditors, including lending institutions, credit card issuers and insurance companies. For your reference and comparison, here are the FICO score ranges and what they mean:

 FICO Score Range  Rating   Meaning
 850 - 800  Exceptional  This score demonstrates to lenders that you are an exceptional borrower.
 799 - 740  Very Good  This score demonstrates to lenders that you are a very dependable borrower.
 739 - 670  Good  Most lenders consider this a good score.
 669 - 580   Fair  Many lenders will approve loans within this score.
 579 - 300  Poor  This score demonstrates to lenders that you are a risky borrower.

What Can You Do If You Have Too Much Debt?

If you have too much debt, you may struggle financially to make all your monthly payments — which can lead to more anxiety and less financial security for you and your loved ones. Here are a few suggestions about what to do if you are carrying too much debt:

  • Review and revise your budget – Knowing more about how you got into debt can help you get out of it faster. A good first step is to evaluate your budget. If your expenses are obviously a lot more than your income, how can you spend less money? Itemize all your monthly expenses to determine where you may be able to eliminate unnecessary expenses. Those digital streaming services and restaurant outings may be good places to start reducing your spending.
  • Increase your income – One way to pay down your debt faster is by bringing in some additional income. You may want to consider seeking more lucrative employment or taking on a second job to help get your debt under control.
  • Restructure your debts – If you are struggling with making your debt repayments, reach out to your credit card companies and ask for help. You may be able to negotiate a repayment plan with your credit card issuer to possibly waive or lower your minimum monthly payment, reduce your interest rate and forgive previous late fees. A debt consolidation loan may be another option to combine all of your current debt into a single monthly payment at a lower interest rate. Depending on your current credit score, a debt consolidation loan might help reduce your credit card interest rate — which could be as high as 20% or more — down to 10% or less.
  • Take advantage of 0% balance transfers – If you are paying a high interest rate on one credit card and have a 0% annual percentage rate (APR) balance transfer offer on another card, move your money. With these balance transfer offers, the 0% APR only lasts for a limited time, usually between nine and 18 months. Keep in mind that your credit card company also will charge you a transfer fee, typically from 3% to 5% of the total transfer amount. While these offers do not completely eliminate your debt, they help give you time to pay down more of your principal debt at a 0% APR.
  • Consult a debt advisor – It may be time to ask for additional help by talking with a debt advisor at a credit counseling agency. These financial professionals can help you assess your overall financial situation and come up with the most effective strategy to pay down your debt so you don’t become overwhelmed and face possible default on your payments down the road.

Using This Calculator

Based on your answers to a few assumptions, our debt calculator can quickly determine how much of your disposable monthly income is going toward paying down your debt. If your estimated monthly loan repayments exceed 45% of your disposable income, it may be financially challenging for you to make these payments if you can’t increase your income or restructure your debts. If your DTI ratio is even higher — more than 70% — it may be time for you to consult with a debt advisor. For the purposes of this calculator, a DTI ratio below 45% falls within reasonable limits based upon your current income and debt repayments.

A summary table and pie graph also are generated by this calculator to help you better understand the impact of your debt on your overall finances.

About Your Inputs

Our How Much Debt Is Too Much? Calculator asks you several questions about your income, mortgage and consumer debt to help you assess your current level of debt:

  • Monthly after-tax income – Enter a total dollar amount for the net income you earn each month after you pay all your required taxes.
  • Monthly mortgage payments – If you carry a mortgage on your home, how much do you pay each month in principal and interest? (If you escrow money to pay property taxes and insurance, you should not include these expenses in your monthly mortgage payment.)
  • Total outstanding balance on consumer debt – Include here your current balance of consumer debt that you owe. This amount includes credit cards, car loans, personal loans and consolidated debt loans. Do not include your mortgage payment.

About Your Results

After filling in your amounts for the financial assumptions, this How Much Debt Is Too Much? Calculator reports back your estimated monthly loan repayments and what percentage of your disposable monthly income this amount is. It will also indicate your level of difficulty in making these payments and offer possible recommendations on actions for you to take to address your current amount of debt. A summary table lists your take-home pay, mortgage payment, other debt (calculated as 2% of your current balance) and disposable income in dollar amounts as well as your short-term debt, mortgage payments and remaining disposable income as percentages of your take-home pay. 

A Debt Servicing to Income illustration also shows your mortgage, debt payments and disposable income as different colored segments (with percentages) of a pie graph.

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