How Much Debt is Too Much?

Assessing Your Debt

If you wonder how much debt is too much, or how much is “normal,” the answer is another question: How much debt can you afford?

U.S. household debt is on the rise, after a brief decline during the COVID-19 pandemic. By late 2022, Americans had more than $16.15 trillion in debt, 2 trillion more than at the end of 2019. That includes $11.39 trillion in mortgage debt and $1.5 trillion in auto loans. The increase in credit card debt from mid-2021 to mid-2022 was $100 million, the highest year-over-year increase since 1999. Total credit card debt is now $890 billion.

Delinquencies – missed payments – ticked up in 2022. That shows that many Americans – maybe you? – have too much debt for their budget.

To determine if you have too much debt – and what you can do about it – it helps to understand different types of debt.

Secured debt, like mortgages and auto loans, is backed by collateral – something of value the lender can take ownership of if the borrower can’t pay.

Unsecured debt, on the other hand, is often considered “bad debt.” It is backed only by the borrower’s promise to pay. Because there’s nothing tangible to back it, lenders charge fees and higher interest rates. The more of a risk you are – as judged by your credit score – the higher the fees and rates are.

Let’s take a look at how to determine if you have too much debt and how to tackle it.

» Learn More: How to Find Out How Much Debt I Have

Debt-to-Income Ratio

So, how much debt can you afford?

Whether you make $1,000 a week or $1,000 an hour, there is a standard formula lenders use to determine whether debt will become a problem. It’s called debt-to-income ratio (DTI), and the math is pretty simple: recurring monthly debt ÷ gross monthly income = DTI. It is expressed as a percentage. You should shoot for 35% or less (more on this shortly).

Recurring monthly debt is bills you must pay every month, like mortgage or rent, car payment, credit cards, student loan and monthly debt bill.

Gross monthly income is how much you make every month before taxes, insurance, Social Security, etc. are taken out of your paycheck.

Let’s say you pay $1,000 a month on your mortgage, $500 on your car loan, $1,000 on credit cards and $500 on student loans. Your total recurring debt is $3,000 a month.

Let’s say your gross monthly income is $6,000.

Recurring debt ($3,000) ÷ gross monthly income ($6,000) = 0.50 or 50%. That’s not a good DTI.

If your DTI is higher than 43% you’ll have a hard time getting a mortgage or other types of loans. Most lenders say a DTI of 36% is acceptable, but they want to lend you money, so they’re willing to cut some slack.

Many financial advisors say a DTI higher than 35% means you have too much debt. Others stretch the boundaries up to the 49% mark.

» Learn More: Loans for High Debt-to-Income Ratios

Calculate and Evaluate Your Debt

DTI is only one indicator of financial health – knowing the specifics is important, too. You may have an idea in your head about how much you pay a month to creditors, but knowing the actual figure is a big first step to solving the problem.

To find out what role debt plays in your financial makeup, find a DTI calculator online – search for “DTI calculator.” You will have to do the work of inputting all your debt and income, but the result will be a picture of how much of the money you take in is being eaten up by debt.

If your combined mortgage and consumer debt payments exceed 45% of your take-home pay, you may want to consider working with a credit card consolidation company to lower your monthly payments.

Aside from DTI, understanding types of debt and other red flags will help you determine whether you have too much debt.

How Does Your Debt Compare?

Debt enjoyed a banner year in 2022, with a $312 billion increase over 2021, for a U.S. household debt record of $16.15 trillion.

For a little perspective, you would need a stack of $1,000 bills 364 feet high to have $1 billion. To reach $1 trillion, that stack would have to be 63 miles high. So, America’s debt is approximately a 1,017-mile-high stack of $1,000 bills.

Welcome to Debt Mountain.

Mortgages account for most of U.S. household debt. Americans had $11.39 trillion in mortgage debt in 2022. The average balance owed on a mortgage is $220,380 and rising as interest rates and the cost of homes go up.

The most common type of debt, though, across all income and age levels, is credit card debt. Credit cards are easier to get than a mortgage, and even someone with a relatively low income can open multiple accounts. They’re also easier to over-use, especially if you’re having trouble paying for household necessities. And it’s harder to get a handle on making payments high enough to make a difference in what you owe.

In 2022, limits on credit cards shot up at a higher rate than they had in 10 years, to $4.22 trillion, meaning Americans can charge more on their cards. Some 233 million new credit card accounts were opened in the second quarter of 2022 alone, the highest number of new accounts since 2008.

Consumers, particularly lower-income ones, had more trouble paying credit card and auto loan bills in 2022 than in the previous two years, which had historically low delinquency rates, boosted by COVID-19 relief. The states with the highest rate of people 30 days or more behind on the auto loan payments were Arkansas, Delaware, Georgia, Louisiana, Mississippi, Missouri, North Carolina and Texas,

“While overall credit profiles thus far remain resilient, the recent uptick in delinquencies in some households suggests that many communities or individuals are experiencing the economy differently,” a group of economists who studied the numbers for the New York Fed said. “We are seeing a hint of the return of the delinquency and hardship patterns we saw prior to the pandemic. Despite that, many are experiencing a strong economy and robust consumer demand, but the impacts of inflation are apparent in high volumes of borrowing.”

Student loan debt was at $1.59 trillion in 2022, largely unchanged from 2021, with the average borrower owing $37,584.

Many student loan borrowers could get a break on what they owe in 2022. The pause on repayments, spurred by the pandemic, was extended to January 2023. Borrowers may also benefit from the Biden Student Loan Forgiveness Plan that reduces student loan debt by $10,000 for borrowers who earned less than $125,000 a year ($250,000 for a household), and by $20,000 if they received a federal Pell Grant while in school. However, that plan is being contested in the courts and the final outcome is undecided as of October.

Many forms of unsecured debt, like personal loans, medical bills and utility bills make up the rest of that 1,017-mile-high mountain of debt.

The mountain is likely higher than the numbers show. Debt statistics don’t include debts held by people without credit scores, including rent, payday and other high-interest and unsecured debt that can be budget-breakers for people with low incomes.

• Consumer Debt in Florida
• Consumer Debt in Texas
• Consumer Debt in California
• Consumer Debt in New York

What Is Good and Bad Debt?

Debt is often talked about in a negative way, but believe it or not, there’s actually “good” debt. Good debt is money you owe that can have a positive impact on your finances in the future, and even currently. Bad debt drains your pocketbook and hurts your credit score, with no positives attached.

Let’s take a closer look.

Good debt is usually secured debt – meaning it’s attached to something of value. A mortgage is the best example. It’s likely the largest amount of money you will ever owe, but as your balance decreases, your equity increases. If you own your house long enough, it becomes a financial asset. Because the house is security on your loan, the interest rates are low. Even with recent interest rate hikes, interest on a mortgage is a fraction of credit card rates.

Good debt is also tax deductible, including mortgage interest, student loans and business loans. It has a low interest rate, and you are getting something of value in exchange. Even though your student loans aren’t buying an item, they’re paying for something that will likely allow you to earn more. A business loan allows you to improve your business and make more money.

Bad debt has high interest rates and the value of whatever you borrowed the money for doesn’t offset what you end up paying. Some examples are high-interest loans for a vacation, or a car loan with such a long term that you will eventually owe more than the car is worth.

Credit card debt is among the worst. The balance may never seem to go down as you struggle to make minimum payments. Even if you pay all your bills on time, credit card debt will have the most negative impact on your credit score. The higher your balances are, versus your credit limit, the lower your score.

Other high-interest debt, particularly things like super high-interest payday loans, can put you into a debt spiral that can seem impossible to get out of. That’s bad debt.

Good debt can become bad debt, too. If you have a mortgage you can’t afford, end up underwater on your house, or take out a home equity loan or line of credit just to stay afloat and end up in danger of foreclosure, that’s bad debt. Your mortgage goes from being an investment to a financial liability.

Warning Signs You Have Too Much Debt

It may be hard to tell if your little piece of the U.S. debt mountain is too high. After all, if everyone owes money, how are you that much different from anyone else?

Besides checking your DTI, there are other red flags to look for.

Some of the top signs that you have too much debt.

» Learn More: How to Pay Off $40,000 in Credit Card Debt

You Are Frequently Charged Over-the-Limit Fees or Maxed Out Your Credit Cards

Many credit cards charge fees for spending over your credit limit or maxing out your credit card. Doing so will make the month’s balance and payment higher than last month. If all of your credit card balances are greater than 80% of your credit limits, that’s a danger signal.

You Cannot Pay off Your Credit Card Debt in One Year

As a rule of thumb, you have too many credit cards or are carrying too much debt if you cannot pay off your combined credit card debt within one year. Do the math and see if you could fit payments into your budget to pay all your balances down to zero in 12 months. If you can’t, you have too much debt.

Using Credit Cards to Pay for Essentials Like Gas and Food Because You Are Out of Money

Many people use credit cards for small purchases such as gas and food. If you used to pay cash for these or other small items, but are now using credit, it could be a sign that there’s a problem.

High Debt-to-Income Ratio

Your debt-to-income ratio measures the amount of debt you have against your income. If you have a debt-to-income ratio near or more than 40%, this is a sign that you may have a debt problem.

No Money for Emergencies

It’s important to keep an open credit line for emergencies. If you can’t pay for emergency auto repairs or medical expenses because your credit cards are tapped out, or most of your earnings go to credit card bills or other debt every month, you have too much debt.

You Make Only the Minimum Payments

With minimum payments, it may take 12 to 15 years to pay off revolving credit card debt. With a minimum payment, most of the money is going to interest, not principle. Your card statement shows how long it will take to pay off the balance – and how much you will pay – if you make only minimum payments.  If you can’t pay more, it’s a sign you’re overextended, and you should put together a budget.

Paying Off One Credit Card with Another Credit Card

Taking cash advances to pay bills is not a solution for paying off debts. Paying one credit card with another line of credit only creates more debt. In addition to the original debt, you are adding cash advance fees and interest.

You Use Balance Transfers

Many creditors offer credit cards with balance transfers, available at low interest rates for an introductory period. After the introductory period, though, the interest rates typically skyrocket to 18% or more. Credit card companies also charge fees for transferring balances. If you keep switching credit card balances, you may have a problem managing your finances.

Skipping Payments

If you’re late paying your mortgage, rent, car loan, or utility bills – things that are necessary for living – and find yourself juggling bills and skipping payments, it’s a definite sign that you have a debt problem.

Borrowing Money from Friends and Family

If you are asking for money from friends and relatives to pay your bills, credit counseling can help you learn how to budget, or put you on a plan for paying off your debts. If you refinance your debts before they’re paid off, you’ll likely be subject to administrative fees and higher interest rates from lenders.

Debt Consolidation Loans

If you’re borrowing to pay off debt with a debt consolidation loan, it could end up adding to the problem. Once the bills are paid off, some people continue to charge on credit cards, which means they have to pay back the loan as well as new credit card debt.

Unsure of the Amount Owed

Many people have no idea how much monthly debt they carry. If you keep using credit cards and are not tracking your spending, your financial situation is either out of control, or could get there quickly.

Your Credit Card Payments Are More Than Your Mortgage

If your combined monthly credit card payments are higher than your mortgage payment, you have too much credit card debt.

Your Credit Score Has Declined

If you are using too much of your available credit, or are late on payments, your credit score will decline. A lower credit score will make it harder to borrow or consolidate debt at a lower interest rate, and thus harder to pay off the debt that you have accumulated.

Getting Turned Down for Loans

Getting turned down for a credit card, a mortgage, auto loan, or any other credit, is a sign that you have too much debt.

You Don’t Have Enough Money for a $1,000 Emergency Fund

If you don’t have a $1,000 emergency fund and your debt payments make it impossible to save that much over three months, you have too much debt.

You Are Getting Calls from Collection Agencies

If you are afraid to answer your phone because it might be a bill collector, you have too much debt. In this case, it’s not only important to know your rights with debt collectors, but also to consider contacting a nonprofit credit counseling agency to find ways to make the calls stop.

You Have Asked for an Advance on Your Paycheck

Not having enough income to pay for your expenses and make debt payments is a sign that your debt is too high. Taking an advance on your salary will only make the situation worse next pay period.

You Use Payday Loans

Using payday loans is another sign that you are in over your head with debt and you need help. The interest rate there is an astronomical 399%. Compare that to the average credit card interest rate of 18%.

Your Net Worth Is Less Than Zero

If you owe more than you have, you have a negative net worth. This is another sign that you have too much debt.

Auto Debt: How To Tell If You Have Too Much

If you haven’t shopped for a car in awhile, get ready for sticker shock. The average U.S. light-vehicle price was more than $48,000 in 2022. The average monthly payment on a new car is more than $600, and more than $500 for a used car. On top of that, many households have multiple vehicle loans.

With prices so high, the once-traditional 48-month payment plan has been stretched to 72 months and even 84 months. Longer terms mean lower monthly payments, which make cars more affordable. On the other hand, interest and the fact cars lose value fast means you can end up owing more money than the vehicle is worth. A new car drops about 11% in value the minute it’s driven off the dealer’s lot, so pay attention to the car’s resale value. You may reach a point where even selling the car doesn’t help – you may use the proceeds to pay off what you owe, and still owe the bank money.

A Sign Your Auto Loan Is Too High

Your auto loan is too high if you need more than a 60-month loan, and you can’t afford a 20% down payment. Monthly payments should be less than 10% of gross monthly income.

Use an auto loan calculator to see how much you can afford to borrow before you buy.

What to Do When You Have Too Much Auto Debt

If you can’t pay your car loan:

• Sell the car if you can manage a profit from it, even for slightly less than it’s worth, and buy a car you can afford.
• Refinance for a lower interest rate.
• Use alternative transportation – carpooling, public transportation, a bicycle. If you live in a rural area, where a car is necessary, see if your state or community has programs that help offset transportation costs.

Mortgage Debt: How Much Is Too Much?

The median price of a house in the U.S. in 1963 was $18,000. In 2022, it was $389,500. Rising prices are good news for homeowners. It means the value of your home and equity is rising. But if you’re buying one, it’s not good news, particularly as interest rates continue to rise, along with other costs.

A Sign You Owe Too Much on Your Home

You owe too much on a home if your monthly payment exceeds 28% of your gross monthly income.

If you’re buying, make sure you calculate how much you’ll pay a month, including interest, homeowner’s insurance, private mortgage insurance (PMI) and taxes. Making a 20% down payment will save you thousands of dollars in PMI.

A 15-year mortgage as opposed to a 30-year means higher monthly payments but will save tens of thousands of dollars in interest over time.

Check a mortgage calculator to determine how much house you can afford.

How to Deal with Too Much Mortgage Debt

If you can’t pay your mortgage, try refinancing. If you can get a lower interest rate, it will make your monthly payment more affordable.

You may also refinance for a longer term, which would lower monthly mortgage payments, but increase what you pay overall.

Consider selling the house and finding something that fits your budget, or renting vs. owning. If you rent, you aren’t building equity, but you have more flexibility if financial challenges arise.

Student Loan Debt: Have You Borrowed Too Much?

It’s no secret that college costs, and the loans students take out to pay them, are more than most can afford. Student loans are the biggest debt bill people under 29 have, making up about a third of their debt.

The average cost of tuition and fees for the 2022-23 school year at a private college was $39,723, according to U.S. News and World Report. Out-of-state students at public schools paid an average $22,953, and in-state residents paid $10,423.

Some of the top liberal arts schools in the country charge as much as $66,000 a year, though in reality, students may pay much less as schools try to find ways to make an education more affordable for their students.

Student loan forbearance during the pandemic was extended to January 2023, and students in 2022 were given a one-time chance to have a large chunk of what they owe forgiven. Many colleges and even geographic regions also began to look at ways to make college more affordable, particularly for moderate to low-income and first-generation students. The six New England states, for instance, formed the New England Regional Student Program, in which residents of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont can get discounted tuition as out-of-state students at New England public colleges and at universities.

Still, experts expect delinquency to creep back toward pre-pandemic levels. Before the pandemic, millions had not made a payment on more than $150 billion in federal student loans for at least nine months, and total defaults were 14% higher than 2015. If the one-time forgiveness program isn’t nullified by the courts and forbearance ends, those with student loans may still find the debt crushing.

The average student loan payment is $393, and the median balance (half owe more, half owe less) is $19,281, according to the New York Federal Reserve.

A Sign You Have Too Much Student Loan Debt

If you’ve borrowed more in student loans than what you will receive for a year’s salary, that’s too much. Total student loan debt shouldn’t exceed what you can repay in 10 years.

On a more micro level, if you’re struggling to pay the usual monthly bills – rent, food, car – because of what you owe in student loans, it’s a problem.

What to Do When You Have Too Much Student Loan Debt?

Consolidate and refinance your loans for a lower interest rate. Student loans, whether federal or private, can’t be refinanced with a federal student loan, but can be through a private lender.

There are also income-driven repayment plans for federal student loans, which set monthly payments based on your income.

If you haven’t taken out loans yet, shop for your education and career before shopping for loans. The actual cost of a college or university is often much lower than the sticker price. Check out aid programs, both by the institution and in general. State and community colleges also charge a fraction of what some private universities do, for more educational bang for your buck.

How Much Credit Card Debt Is Too Much?

As oppressive as mortgage, car and student loan debt can be, at least they don’t leave you feeling like you’ve been flimflammed by a con man. Credit card debt should have that effect. The problem is, it often doesn’t.

The flimflam is the interest rates, which are three to four times higher than other types of debt. There are reasons, though, credit card companies charge such rates.

First, they must protect themselves from getting burned by high-risk lending.

Second, they can charge whatever they want. And that’s mainly because most people don’t do the math and see how interest rates silently turn those $120 sneakers into $149 lead weights.

How to Tell You Have Too Much Credit Card Debt

You have too much credit card debt if you:

• Are only making minimum payments.
• Can’t pay off your total credit card debt in one year.
• Are using credit cards to pay for essentials, like gas and food.
• Are using one card to pay off another
• Are using balance transfer cards, then running cards back up
• Are paying more monthly on credit cards than your mortgage

How to Deal with Too Much Credit Card Debt

Ask for a lower credit card interest rate. Credit card companies may agree, particularly if you threaten to transfer the balance to a competing card with a lower rate.

Use cash instead of credit.

Consolidate your cards by putting all your debt on the one with the lowest interest rate.

If you can’t pay your credit cards, consider a debt management program, which combines multiple payments into one payment that’s the same about every month. Counselors at a nonprofit credit counseling agency like InCharge Debt Solutions work with creditors to decrease interest rates, and may even waive late and over-limit fees.

The Impact on Your Financial Health

Let’s return to that sneaker example. Debt is like having 100-pound lead weights strapped to each foot.  It keeps you from running freely through much of life.

If you can keep away from debt, it opens the door to home loans, car loans, investing in your future, having a comfortable retirement, paying for emergencies and simply having enough to buy Christmas presents.

On the other side, debt adversely affects your credit score, since 30% of that calculation is based on the amount of debt you have. The worse your credit score, the more you’ll pay in interest on credit cards and loans.

How to Deal with Too Much Debt

Between the warning signs and the debt-to-income-ratio, you should find an answer to the question of how much debt is too much debt for you.

If your DTI is below 35% and no red warning flags are waving, congratulations! But if you determine your debt is too much, it raises an even more important question: What are you going to do about it?

The simple solution is to make more money, cut expenses or both. It takes dedication and a display of personal responsibility, but it also takes a plan.

Generally, though, cutting expenses is a more realistic and immediate solution than “making more money.”

Write down all your expenses and see where you can cut back. The devilish thing about unsecured debt is that the less you pay each month on the balances, the more you’ll eventually pay in interest charges.

One way to combat that is to get the lowest interest rate possible. A lot of consumers have turned to debt management programs, where a credit counselor helps you consolidate payments and lower interest rates on credit cards.

The counselor also helps you design a budget with expenses you can afford and simultaneously helps get rid of your debt.

Once your personal debt mountain starts to melt, you’ll have more disposable income to pay other bills, manage emergencies and feel the relief of not having the weight of impossible debt bearing down on you.