How Much Debt Is Too Much?
- Debt becomes too much when it's no longer affordable.
- If you're struggling with minimum payments or juggling several maxed-out cards, you probably have too much debt.
- Common ways of handling too much debt include budgeting, consolidation, and settlement.
Most of us use debt as a part of our everyday lives. Credit cards, car loans, mortgages—nearly all of us have some kind of debt at one time or another. And there's nothing wrong with that.
Debt can be a powerful tool. Like any tool, though, how effective it is depends on how you use it. And using it wrong could backfire on you.
Where's that line with debt? It's normal to wonder if the debt you're carrying is a reasonable part of modern life—or just a bit too much.
Quick Answer: If You Can't Afford It, It's Too Much Debt
Your debt crosses the line from “reasonable” to “too much” when you can't afford the payments anymore.
There's no magic number that equals too much debt. For some people, $1,000 might be too much debt. For others, you can add a few zeroes before things get dicey. Your income is a big factor, as are your general expenses.
3 signs you likely have too much debt
Consider your debt for a few moments. Now ask yourself if you:
Struggle to make your minimum payments
Have credit cards near or at their credit limits
Feel stressed when you think about your debt
If you're experiencing any of these things, it's time to take a hard look at your finances. You have a lot of options for getting your debt under control—and it starts with realizing it's time for action.
How Lenders Decide if You Have Too Much Debt
Even if you feel comfortable with your level of debt, lenders might not. Potential creditors are likely to have a different view of your debt than you do—one that centers around minimizing the risk of losing money if they lend to you.
Lenders use a metric called the debt-to-income (DTI) ratio to gauge your debt levels. To find your DTI, add up all of your debt and housing costs for the month. Then, divide the total by your monthly pre-tax income. Multiply that figure by 100 to show it as a percentage.
Example: Say you make $5,000 a month and spend $1,500 a month on housing and debt payments. Here’s how to calculate your DTI:
$1,500 / $5,000 = 0.3 x 100 = 30%
The DTI a lender will accept depends on the lender and type of loan, as well as your other qualifications. Generally, lenders prefer DTIs below 36%, though a DTI below 43% is still acceptable to many.
It's not just your existing debt that's added into the calculation. Lenders will also consider what your DTI would be if they gave you a loan. Your DTI with the new loan has to be below the lender's max to get approved.
What to Do If Your Debt Becomes Too Much
You're struggling with minimums, juggling cards, and losing sleep over your debt. Now what?
Now it's time to figure out how to get your debt levels back under control. The best way to do that will depend on your own situation. Try these steps.
1. Evaluate your finances
Make a list, use a spreadsheet, download a budgeting app—whatever method you prefer. You want the big-picture view of your personal finances, down to the last penny. Figure out exactly how much is coming in and where it's going.
Include all of your debts. Add balances, interest rates, and monthly payments for each one. Check your free credit reports using AnnualCreditReport.com to make sure you've included every account.
2. Find or make extra money for debt
With your finances laid out, it should be easy to figure out the next step. You may have things in your budget you can cut so you could pay down your debt faster. If not, consider ways you can increase your income.
Anything you can find to put toward your debt, do it. Start on the debts with the highest interest rates. Extra payments to your principal cuts down on your interest fees and helps you get rid of debt faster.
3. Consolidate with better terms
High-interest debt is often harder to pay off because the interest slows down your progress. If you have at least fair credit, you could potentially consolidate your high-interest debt at a lower interest rate.
Consolidation uses a new loan to pay off multiple debts. This could simplify your budget and streamline your finances. Also, consolidating at a lower rate could cut your monthly payment and speed up debt payoff.
4. Negotiate with your creditors
Some events cause us undue financial hardship, like losing a job or a spouse. If your debt has become too much to handle because of financial hardship, consider reaching out to your creditors.
Many creditors offer short-term hardship programs that might make it easier to manage your debts for a time. This could include a temporary pause in payments or reduced interest rates.
If you've already fallen behind on your debts, you might try to negotiate a debt settlement. This is when your creditors agree to accept less than you owe and forgive the rest of your debt. You could negotiate a debt settlement on your own or hire a professional debt relief company.
5. Get help from a pro
We can't all be good at everything. That's why we have professionals to turn to when something is simply outside our area of expertise.
The type of professional you need will vary with your circumstances. An accountant or financial advisor might be the right move if you want help with a debt payoff game plan. A debt relief professional could be useful if you're interested in settling overdue debts. Talking to a bankruptcy attorney might be the right call if you're overwhelmed by unsecured debt and have few assets
There's no one right move for everyone when it comes to debt. We all have our situations that determine the best path forward. The important part is to take steps to move forward so you can start handling your debt and start getting your life back.
Author Information
Written by
Brittney Myers
Brittney is a personal finance expert and credit card collector who believes financial education is the key to success. Her advice on how to make smarter financial decisions has been featured by major publications and read by millions.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
What is the ideal DTI ratio?
A DTI below 36% is generally considered to be ideal. You could still get a loan with a DTI up to 43% or even up to 50% in some cases. Anything over 50% is likely to make borrowing very difficult.
Is $20,000 in debt a lot?
Whether $20,000 is a lot of debt depends on your income, your expenses, and the type of debt. A mortgage with a $20,000 balance and a low interest rate may not be a concern, especially if you have a high income. But $20,000 in credit card debt while you're struggling to make the minimum payment can feel overwhelming.
How long does it take to get rid of debt?
It depends on the amount of debt, the type of debt, and your overall situation. For credit cards, paying more than the minimum is the way to speed your debt payoff. Installment loans typically have a set repayment term, with most personal loans lasting two to six years.
A debt management plan (DMP) usually takes three to five years. Debt settlement programs typically take two to four years to complete. Bankruptcy could be fast or slow; Chapter 7 can be over within months, while Chapter 13 payoff plans take three to five years.