Debt Load and Your Finances

Borrowing money is a common financial practice, but how much debt is too much? It depends on factors like your total debt, monthly payments, income, and overall wealth. Managing your debt load effectively is one key to healthy finances.

What Is Debt Load?

Debt load is the total amount of debt you owe, including loans, credit card balances, and other obligations. It’s often measured by the debt-to-income (DTI) ratio, which is the total of your monthly debt payments divided by your monthly income (before taxes). For example, if you pay $2,000 monthly in debts and earn $6,000 monthly, your DTI is $2,000 / $6,000, or 33%.

Individual debts might be manageable, but multiple debts can combine to weigh you down. That’s why many borrowers turn to debt relief solutions. One such solution is debt consolidation, which could simplify your debt and lighten the burden on your monthly budget. Your ability to handle your debt load depends on your income, savings, and other factors.

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How to Calculate Your Total Debt Load

Here’s how to figure out your debt load, and the related debt-to-income ratio and net worth. Knowing these numbers could help you make a repayment plan with confidence.

How to calculate what you owe

Here’s a simple step-by-step process.

Step 1: Gather your information.

Create a list of all your outstanding debts. Include:

• Credit cards

• Personal loans

• Auto loans

• Student loans

• Mortgages

• Any other installment or revolving debt

You don’t need to include monthly utilities, subscriptions, or other living expenses—this calculation focuses on borrowed money.

Step 2: Write down balances and minimum payments.

For each debt, record the total balance and the required monthly minimum payment.

Step 3: Add them up.

Add together the balances to see your total debt load. Separately, add the minimum payments together to see the total amount you must pay each month to stay current.

Example:

• Credit cards: $8,500 balance, $250 monthly minimum

• Auto loan: $12,000 balance, $320 monthly minimum

• Student loans: $7,500 balance, $100 monthly minimum

Total debt load: $28,000 Total monthly minimums: $670

These numbers give you a snapshot of your obligations. Knowing your total debt load also helps you explore repayment strategies like debt settlement, consolidation, or refinancing.

Is this too much debt? To find out, calculate your debt-to-income ratio next.

How to calculate your debt-to-income ratio (DTI)

Your debt-to-income ratio tells you how much of your income is spent on debt. Here’s a short step-by-step process:

• Add up all your monthly debt payments. Again, use minimum payments. 

• Divide your yearly income (before taxes) by 12. That’s your monthly income.

• Divide your monthly debt payments by your monthly income (payments ÷ income).

• Move the decimal point two digits to the right. Stick a percentage symbol on the end. That’s your debt-to-income ratio.

Say your monthly debt payment is $670, and your yearly income before taxes is $60,000. To get your monthly income, you divide $60,000 by 12 and get $5,000. 

DTI = monthly payment ÷ income

DTI = 670 ÷ 5,000 = 0.134

Move the decimal place two places to the right and add a percentage sign to get your debt-to-income ratio: 13.4%. 

Low DTI means you’re spending a small fraction of income on debt payments. Ideally, your DTI is under 36%. If it isn’t, that’s okay. You can still apply for a new credit account (like a mortgage) with a DTI of 50%. But a higher DTI means the money you earn is largely already spoken for. If most of your money goes to debt payments, there’s less available for food, utilities, transportation, and other expenses.

If you sold all your assets to pay your debts, how much would you have left over? To answer that, calculate your net worth.

How to calculate your net worth

Your net worth is the value of everything you own, including items of negative value, like debt. To calculate net worth, use these three steps:

• Add up assets

• Add up liabilities

• Subtract liabilities from assets.

Step 1: Add up assets

Assets are everything you own, including your house, furniture, car, investments, and anything else you could sell for money. It also includes cash. If you’re not sure what something is worth, make your best guess. 

Step 2: Add up liabilities

Liabilities are everything you owe, including credit card debt, mortgages, interest, student loans, and personal loans. 

Step 3: Subtract liabilities from assets

Your net worth is equal to your assets minus liabilities.

Example:

In this example, your net worth is $54,000.

Net worth shows you how debt directly lowers your wealth. Paying down debt, and thus raising net worth, can be extremely motivating. The higher your net worth, the more secure you are financially.

Impact of Debt Load on Your Finances

A large debt load restricts your financial flexibility by committing a portion of your income to payments over time. Here’s how it impacts you:

• Spending: Debt load reduces income for everyday expenses.

• Borrowing: A high debt load limits your ability to take out additional loans.

• Savings: Monthly payments shrink what you can save or invest.

• Wealth: Your debt load directly lowers your net worth.

• Credit Score: Too much debt load harms your credit, raising your borrowing costs.

Understanding your debt load helps you manage these limitations and make smarter borrowing decisions. Once you understand debt load, you can better understand why lenders deny credit card applications and other loan applications.

Debt shrinks your net worth

Your net worth is your total assets (home value, cash savings, brokerage account balances, and so on) minus your debts. 

Secured debt is usually at least partly offset by the thing you borrowed to get. In other words, you might have $200,000 in mortgage debt, but your home is worth $500,000. If this is your only debt and asset, your net worth is $300,000. As your mortgage balance goes down, your net worth goes up.

But $60,000 in credit debt, since it’s not offset by something of value like a secured debt is, can only cut your net worth.

Debt-to-income ratio measures debt load

The debt-to-income (DTI) ratio measures your debt load by dividing your monthly debt payments by your gross monthly income. For example:

• Maria’s monthly payments are $1,500 (mortgage), $400 (car), and $125 (credit card), totaling $2,025.

• Her monthly income is $6,000.

• Her DTI is 33.75% ($2,025 / $6,000).

Since taxes and essential purchases eat into income you could use to pay down debt, consider your debt load relative to discretionary income (income after taxes and necessities). Once you pay for groceries, utilities, and taxes, how much do you actually have left to pay down debt?

The Federal Reserve says U.S. debt service payments (excluding mortgage debt) typically range from 8% to 13% of discretionary income, though this varies by life stage and debt type. In our example, Maria’s debt payments come to about 8.75% of her monthly income.

Lenders check your DTI

Your DTI tells lenders whether you have room in your budget for a new payment. Once you understand DTI, it’s easier to understand how lenders decide whether to approve your credit applications.

Lenders calculate your DTI. Here’s how it works:

1. Credit bureaus provide lenders with a credit report.

2. Lenders calculate your DTI using the debts listed on the report and the income you numbers you provide the lender. (Your lender usually requests your estimated income on your application.)

3. Lenders decide, based on your DTI, whether to consider you a safe or risky borrower.

Lenders could deny your application if your DTI is above 45-50%. It’s a sign that your finances may be fragile. Lenders are generally more accepting if most of your debt comes from mortgage payments, rather than, say, credit card interest.

Speaking of credit card interest—if you’re using more than 30% of your credit card limit (total, across all cards), your credit score will probably take a hit. Lenders consider your credit score when deciding loan terms, and whether to lend to you. In this case, reducing your debt load could help you improve your score.

Freedom Debt Relief is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Emotional and mental health impact

Carrying a heavy debt load can weigh on more than your bank account. Stress about bills could lead to anxiety, sleep problems, and strained relationships. Over time, financial stress can affect job performance and erode well-being.

How debt influences major life choices

Debt doesn’t just affect day-to-day spending—it can delay important milestones. A high debt load might mean postponing: 

• Buying a home

• Starting a family

• Pursuing further education

For some, it also limits career flexibility, since stable income becomes necessary to keep up with payments. It’s tough to change jobs when doing so might mean losing salary and falling behind on debt payments. Especially if you lack an emergency fund.

Lost financial opportunities

Every dollar that goes toward interest is a dollar not saved or invested. High monthly payments could prevent you from building an emergency fund, investing for retirement, or seizing opportunities like starting a business. In this way, debt shrinks not just your present lifestyle, but also your future options.

Key Aspects of Debt Load

Total debt amount: The grand total of all debts you owe, regardless of type or creditor.

Monthly payment obligations: The total amount required each month to service all of your debts. Monthly payments directly impact cash flow and budget flexibility.

Debt-to-income ratio (DTI): Monthly debt payments compared to your before-tax monthly income. Lenders use this to assess borrowing capacity and financial health.

Types of debt included in your debt load:

• Secured debt (mortgages, auto loans)

• Unsecured debt (credit cards, personal loans)

• Student loans

• Medical debt

• Other financial obligations

Interest costs: The cumulative interest you pay across all your debts. Interest increases the cost of your debt load over time.

Credit utilization: Your credit card balances compared to the credit limits. 

Financial stress: A high debt load relative to your income could be a sign of financial vulnerability, and could mean you have limited capacity to handle financial emergencies or additional obligations.

Manageability: Whether the debt load is sustainable based on current income, expenses, and financial goals.

Debt Load Benchmarks: What’s Considered High?

There’s no single number that defines a “good” or “bad” debt load—it depends on your income, the type of debt, and how comfortably you can manage payments. Here are some general benchmarks to help gauge your situation:

The type of debt matters

Lenders often view installment loans (like auto or student loans) more favorably than revolving debt (like credit cards). For instance, a $50,000 car loan may not raise concern if it’s affordable with your income, but $50,000 on credit cards signals financial strain. 

Here’s why: It’s common to have significant auto or student debt, and those interest rates are low relative to credit cards. It's not unusual for credit card rates to be twice as high as auto loan rates.

Debt-to-income ratio (DTI)

One common debt load benchmark is your DTI ratio. While the “right” percentage varies, many lenders prefer to see debt payments below a certain percentage of your monthly income. If payments consume most of your paycheck, that’s a sign your debt load is too high.

What’s a good debt-to-income ratio? A DTI of 35% is ideal. A DTI of 36% to 50% is acceptable. You might have a hard time getting new credit if your DTI is above 50%. 

Warning signs your debt load is unmanageable

How you know you’ve entered “too much debt” territory:

• You borrow to make payments on existing debt.

• You can only make minimum payments each month.

• Your credit cards are maxed-out.

• You avoid opening bills because of stress.

If you recognize these signs, it may be time to reassess your finances or explore support from Freedom Debt Relief. The benefits could be big. Uncomfortable as it may be, coming up with a plan to tackle debt isn’t just healthy—it’s usually a massive stress relief.

Benefits of Reducing Your Debt Load

There are several benefits to reducing your debt load:

• Reduce total interest paid

• Free up cash for other priorities

• Peace of mind and less financial stress

• Potentially higher credit score, leading to more affordable borrowing opportunities when you need them

Strategies for Managing Your Debt Load

Managing your debt load effectively involves these strategies:

• Budgeting: Track income and expenses to keep your debt load light.

• Prioritizing payments: Use the snowball or avalanche methods (detailed below). The snowball helps you keep momentum. If you’ve got zero motivational hangups, consider the avalanche method instead to save more money on interest. 

• Debt consolidation: Combine debts into one loan to simplify payments or lower costs.

• Credit counselors: Consult credit counselors if your debt load feels overwhelming. A credit counselor may suggest a debt management plan(DMP), a structured plan to fully repay all of your unsecured debts within three to five years. 

• Debt relief programs: Reach out to debt relief programs to settle debts. A professional debt relief company can sometimes settle debt for less than you owe and help you get rid of your debt faster than if you keep making minimum payments. 

If you’re ready to take control, there are practical ways to approach repayment.

DIY payoff methods

Start with one of the two main debt payoff strategies.

• Snowball method: Pay off your smallest balance first while making minimum payments on others. Then move on to the next-smallest balance. Each “win” builds momentum.

• Avalanche method: Target the debt with the highest interest rate first, and move down the list that way. This approach often saves you more money in the long run.

For most, the snowball method is the better bet. It offers something the avalanche method doesn’t: motivation. Many savers run out of motivation partway through. By building momentum with quick wins, you’re more likely to stick to the plan and pay off your debt faster.

Read: Debt Snowball vs. Debt Avalanche: Which is Better?

Debt consolidation

Combining multiple debts into one loan with a single payment may lower your interest rate. It could also lower your monthly payment. This can work well when you have steady income and good credit, which improves your loan approval odds. Explore debt consolidation.

Credit counseling and DMPs

A debt management plan (DMP) through a nonprofit credit counseling agency may help lower interest rates and organize repayment. It works best when you can afford to make full repayment. Learn more about credit card counseling pros and cons before signing up.

Debt relief and settlement

If you’re struggling to make minimum payments, negotiating with creditors may reduce what you owe. Debt settlement could be a lifeline if other strategies haven’t worked. You could negotiate with creditors directly, or hire a professional debt settlement company to do it for you.

Common Mistakes That Increase Debt Load

Avoiding pitfalls is as important as finding solutions. Here are common mistakes that make debt worse—and how to avoid them.

Relying on credit for everyday expenses. Using credit cards for groceries, gas, or bills adds up quickly. Instead, shift to paying with cash or debit. Budget a small grocery, gas, or bill fund to cover costs and keep debt load low. You might start with a category that your cards don’t give very good rewards for. For example, if you only get 1% rewards for gas, build a gas fund.

Making only minimum payments. This extends repayment and increases interest costs. Instead, pay more than minimums whenever possible. You save money on interest—up to thousands of dollars, potentially. And committing to full balance payments makes you pay extra attention to what you’re spending on, like an impulse-purchase limiter.

Taking on new debt while paying off old debt. Consolidating loans but continuing to rack up credit card charges leaves you deeper in the hole. Instead, freeze your cards until your balances are under control. A frozen card means you can’t swipe it or get cash advances. (You’re still on the hook for minimum payments, whether the card gets used or not.)

If you’ve maxed out your cards, consider freezing one card at a time, paying it off, and moving on to the next card. To freeze a card, log into your mobile app and toggle the freeze card option, or call your credit card provider and ask them to freeze it. 

Ignoring high-interest debt. Leaving credit cards for an uncertain “later” allows balances to balloon. Instead, pay credit cards before low-interest options like personal loans or mortgages. If you owe many debts, some much larger than others, check out the snowball and avalanche debt payoff methods, strategies that help you pay down debt fast.

Not seeking help soon enough. Many people wait until debt feels overwhelming. Instead, reach out to your creditor the moment you know you’re going to struggle to make payments. Ask if you can enroll in a hardship program to temporarily make it easier to pay your bills. You may be able to work something out with your creditor before some form of debt relief becomes necessary.

Tips for Avoiding Future Debt Problems

Preventing an unmanageable debt load requires deliberate borrowing habits:

• Plan before borrowing: Create a budget so you know your income can support new debt payments alongside what you’re already paying.

• Emergency fund: Save for unexpected expenses to avoid increasing your debt load.

• Smart credit use: Avoid spontaneous purchases that inflate your debt load.

• Financial discipline: Stick to your budget and pay down debt to keep your debt load in check.

Read: How to Make a Budget Plan Even if You Hate Math

When Professional Help Makes Sense

Sometimes managing debt alone is not enough. Seek professional support if:

• You’ve tried budgeting or payoff strategies without success.

• Your debt balances continue to rise despite consistent payments.

• Collection calls or past-due notices are piling up.

• You’re forced to choose between paying debt or covering necessities.

Benefits of professional negotiation. Debt settlement firms can work directly with creditors to reduce the amount you owe, often creating more manageable repayment plans. This differs from consolidation or credit counseling, which generally focus on reorganizing or lowering interest rates.

For the details, review how Freedom Debt Relief works or see who we help. Professional help isn’t right for everyone, but for many, it’s the turning point toward financial stability.