How Much Debt is Too Much?
Increased spending on home, auto and student loans has pushed household debt to record levels in the U.S. Find out ways to keep your budget from busting.
Choose Your Debt Amount
Assessing Your Debt
Forget 20,320 foot Mount McKinley, by far the highest peak in America is Debt Mountain and millions of Americans are making it taller every day.
Americans as a group have accumulated nearly $14.6 trillion in debt, and of that $963 billion is revolving debt – the kind that doesn’t have one set payment and frequently never seems to decrease.
Overall, the average American owes $92,717, and while a lot of that is nonrevolving debt, like mortgages and car payments, it also includes credit card debt.
The good news is that while mortgage and auto loan debt are at an all-time high, consumers chipped away at credit card debt during the COVID-19 pandemic. In fact, credit card balances went down a total $49 billion, the second-largest drop since the New York Fed started doing quarterly reports in 1999. Still, Americans have an average of $5,315 in credit card debt.
How much of that debt can you afford to call your own?
To find the answer, you first need to know what the mountain is made of.
There is secured debt like mortgages and automobile loans. They are backed by collateral (or security), so the lender can repossess your house or car if you default.
There is unsecured debt like credit card debt and student loans, which are backed only by the borrower’s promise to pay. That can be very unsecure.
Secured debt has a better reputation because so much of it is in mortgages ($10.31 trillion in 2021) and your house generally increases in value. Those chrome-plated tire rims you just bought with a Visa card do not. But shiny rims can’t automatically be lumped into the “bad debt” pile.
When it comes to the question of how much debt is too much, there are as many answers as there are people. There are formulas to help you figure it out, and we’ll get to those in a second. But the basic answer is: It all depends on what you can afford.
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 when debt can become a problem. It’s called debt-to-income ratio (DTI) and the math is pretty simple: Recurring monthly debt ÷ gross monthly income = debt-to-income ratio. It is expressed as a percentage and, generally speaking, you would like that percentage to be 35% or less.
Your recurring monthly debt are things you must pay every month like mortgage (or rent); car payment; credit cards; student loans; and any other loans bills that are due every month.
Gross monthly income is how much you make every month before taxes, insurance, Social Security, etc. are taken out of your paycheck.
For example, 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. So, you’re total recurring debt is $3,000 a month.
The first conclusion is that you drive a pretty nice car, but that’s not important to this discussion. What is important is your gross monthly income, which is $6,000. Now let’s do the math.
Recurring debt ($3,000) ÷ gross monthly income ($6,000) = 0.50 or 50%, which is not good.
Many financial advisors say a DTI higher than 35% means you are carrying too much debt. Others stretch the boundaries to the 36%-49% mark. The truth is that while DTI is a handy formula, there is no single indicator that debt is going to ruin your financial health.
Use our Do I Have Too Much Debt Calculator for a breakdown of what percent of your monthly income is going to credit card debt and mortgage, and how much is left as disposable income to pay your other bills.
Do I Have Too Much Debt Calculator
What percent of your monthly income is going to your debt payments? Use the calculator below and get an analysis on whether or not you have too much 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.
How Does Your Debt Compare?
Debt enjoyed a banner year in 2021. Americans racked up $601 billion to run the total U.S. household debt to record-shattering $14.15 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 an 882-mile-high stack of $1,000 bills.
Welcome to Debt Mountain.
Houses account for most of that. Americans held $10.31 trillion in mortgage debt in 2021. That worked out to an average debt of $208,185 for households that carried a mortgage.
But again, that is secured debt. Just qualifying for a mortgage requires at least a minimal level of financial stability.
Credit cards are much easier to get and much easier to abuse. Americans owed $963 billion on revolving debt in 2021. While credit card balances in 2021 were down $157 billion from what they’d been in 2019, it’s important to note that that skews toward older and wealthier card holders. Balances decreased the most for those in their 60s and older with high incomes. The younger and lower-income the person, the less the decrease, on average. And as the recovery gained momentum, signs were that many balances were creeping back up.
The other big unsecured debt was student loans, which were $1.58 trillion in 2021, with the average borrower owing $37,584.
Other forms of unsecured debt like personal loans, medical bills and utility bills make up the rest of that 882-mile-high mountain.
Auto Debt: How to Tell If You Have Too Much?
If you haven’t shopped for a car in while, get ready for sticker shock. The average U.S. light-vehicle transaction price was $40,472 in 2021, according to Kelley Blue Book.
That was an all-time high and it doesn’t look like the upward trend will stop. On average, consumers are paying $563 a month for new car loans, according to Experian.
With prices so high, the once-traditional 48-month payment plan has been stretched to 72 and even 84 months. Lower monthly payments make cars more affordable, but with interest charges, you could end up owing more money than the vehicle is worth. And remember, a new car drops about 11% in value the minute it’s driven out of the dealer’s lot, so pay attention to the car’s resale value.
A Sign Your Auto Loan Is Too High
You need more than a 60-month loan to pay off the car and you can’t afford a 20% down payment. Try to keep your monthly payments below 10% of your gross monthly income.
Take advantage of an auto loan calculator to see how much you can afford to borrow before you go to a dealership.
What to Do When You Have Too Much Auto Debt
Sell the car, even if you get slightly less than it’s worth. Then put that money toward a car you can afford.
Refinance your loan. You could find a lower interest rate, but this is more a Band-Aid than a cure. Better you should consider alternative means of getting around, like carpooling, public transportation, Uber and even a bicycle.
Mortgage Debt: How Much Is Too Much?
Speaking of rising prices, the median price of a house in the U.S. was $18,000 in 1963. It was $341,600 by 2021, according to the National Association of Realtors.
Rising prices are good news if you already own a home, but not if you’re looking to buy one. And the housing market can collapse – the Great Recession of 2008 showed that..
A Sign You Owe Too Much on Your Home
The house you’re thinking of buying costs more than 2.5 times your annual income. For instance, if you make $60,000 a year, avoid any house that cost more than $150,000.
Whatever the sale price, your monthly payment should not exceed 28% of your gross monthly income.
A 20% down payment is highly recommended, since it could save you thousands of dollars in private mortgage insurance (PMI). A 15-year mortgage is also preferable to a 30-year, since you’ll save tens of thousands of dollars in interest.
It won’t hurt to visit a mortgage calculator, punch in some numbers and see exactly how much house you can afford.
How to Deal with Too Much Mortgage Debt
Refinance to a lower interest rate. Though rates were at record low levels in 2020, the Fed was geared to start raising them in 2021 as the pandemic recovery got underway. If you’re paying 5%-6%, the saving could be enough to make the mortgage payment manageable.
You could also refinance to a longer period and lower mortgage payments. Going from a 15-year to a 30-year mortgage will appreciably cut your monthly payments. The downside is you’ll end up paying a ton more in interest over the life of the loan.
Your best option might well be to sell the house and downsize into something that fits your budget. Consider renting versus owning since you can usually rent a house in the same neighborhood for less than you’re paying on your mortgage.
You won’t build any equity, but renting gives you much more flexibility if financial challenges arise.
Student Loan Debt: Have You Borrowed Too Much?
If cars and houses give you sticker shock, you might need hospitalization when you look at what a college education costs.
The average annual tuition for in-state residents at public colleges for the 2020-21 school year was $11,171. Want to go to an out-of-state public university? The average is $26,809. Private colleges are even more: $41,411 is the average cost per year.
It’s even pricier at top-notch schools. Stanford, which charged no tuition from its opening in 1891 until 1920, now cost $55,473 a year regardless of where the student is from. Student loan delinquency – those who were 90 days or more late on payments — in 2021 was a low 6.2%, but that is skewed by CARES Act forbearance during the pandemic. Before the pandemic, millions had not made a payment on more than $150 billion in federal student loans for at least nine months, according to the Consumer Federation of America. The total defaults were 14% higher than 2015.
A Sign You Have Too Much Student Loan Debt
You have borrowed more for your student loan than you will make in your first year’s salary. Also, your total debt should not exceed more than you can repay in 10 years. One more sign would be that you’re struggling to pay the usual monthly bills – rent, food, car payment – because of what you owe in student loans. The average student loan payment was $393 a month in 2021.
What to Do When You Have Too Much Student Loan Debt?
Consolidate and refinance your loans to get a lower interest rate. The rates for federal loans typically range from 3.5% to 7%, but private loans can creep higher.
Federal interest rates are set by Congress and private student loans can’t be refinanced through a federal loan. You can, however, refinance them through private lending institutions.
Federal loans do offer income-driven repayment plans that are worth exploring. In those, monthly payment plans are based on your income.
The best plan is to shop around for colleges and careers before you shop around for loans. Many times, you can get as much educational bang for your buck at smaller state schools or community colleges charging half what top-rated universities charge.
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 time higher than the other major debt components. It must be noted there are reasons 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’ve Borrowed Too Much
You are making only the minimum monthly payments. You cannot pay off your total credit card debt in one year.
You are using credit cards to pay for essentials like gas and food. You are using one card to pay off another card.
You are using balance transfer cards to get low introductory rates, which will expire and rocket back up. Your credit card payments are more than your mortgage.
If any of those situations hit close to home, you probably have too much credit card debt.
How to Deal with Too Much Credit Card Debt
Ask for a lower interest rate. Many credit card companies will cut you a break, especially if you threaten to transfer the balance to a competing card with a lower rate.
Use cash. Peeling off six $20 bills for those sneakers is a lot harder than simply slapping down a piece of plastic and saying, “Charge it.”
Consolidate your cards. Instead of paying varying interest rates, find the lowest one and put all your debt on that one. The danger is the low introductory rate on transfers usually last about a year, then high interest rates kick in.
A better option is to consider a debt management program, where your bills are combined into one monthly payment that is a fixed rate. A nonprofit credit counseling agency like InCharge Debt Solutions has counselors who will contact your creditors and request participation in the plan on your behalf. Your creditors may agree to lower interest rates and possibly waive late fees or over-the-limit fees, saving you a lot of money.
Warning Signs You Have Too Much Debt
What do you do when your little part of that mountain of debt is too high? Besides the DTI, there are everyday red flags like making only minimum payments on your credit card.
A few other signs that you’re getting in over your head:
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 cards. This will make this month’s balance larger than last month’s. If all of your credit card balances are greater than 80% of your credit limits, consider that a danger signal.
You Cannot Pay off Your Credit Card Debt in One Year
As a general rule of thumb, you either have too many credit cards or you are carrying too much debt if it seems you cannot pay off your combined credit card debt within one year. When was the last time you had a zero balance on your credit cards?
Using Credit Cards to Pay for Essentials Like Gas and Food Because You Are Out of Money
Many people are using credit for small purchases such as gas and food. If you previously paid 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 over 40%, this is a sign that you may have a debt problem.
It’s a fact. Crises and emergency situations happen, and people sometimes can’t pay for emergency auto repairs or medical expenses because their credit cards are tapped out or most of their earnings are applied toward debt repayment. It’s always important to keep an open line of credit available for such situations.
You Make Only the Minimum Payments
What many people don’t realize about revolving credit card bills is that making only the minimum payment-or less will mean taking 12 to 15 years to pay it off. Making only the minimum payment means you are not applying any significant amount toward the principal. If you’re making only the minimum payments on your credit cards every month, you may be overextended and in need of putting together a spending plan.
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 actually creates more debt. In addition to the amount equivalent to the original debt, you will be faced with any cash advance fees and interest from that new line of credit.
You Use Balance Transfers
Many creditors offer new credit cards with balance transfers available at low interest rates for an introductory period. It’s important to remember, though, that after the introductory period the interest rates typically skyrocket to 18% or more. Additionally, credit card companies are charging fees for transferring balances. If you keep switching credit card balances, you may have a problem managing your finances.
Are you late paying your mortgage, rent, car loan, or utility bills more than once per year? If you juggle bills and skip payments, this is a definite sign that you have a debt problem.
If friends and relatives are constantly giving you money and you’re still short on 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
Are you borrowing from a new source to pay off an old debt? Many people who do so obtain debt consolidation loans to pay off all their existing bills. However, once the bills are paid off, some people wind up charging on their credit cards again. This means having to pay back the loan plus the new credit card charges, which drives people needlessly into further debt.
Unsure of the Amount Owed
Many people have no idea how much debt they carry on a monthly basis. If you keep using credit cards and are not tracking your spending, your financial situation could get out of control quickly.
Your Credit Card Payments Are More Than Your Mortgage
If your combined credit card payments exceed 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, 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 or a mortgage 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 for your phone because you think it might be a bill collector, you have too much debt.
You Have Asked for an Advance on Your Paycheck
Not having enough income to pay for your expenses and your debt payments is a sign that your debt has grown too high. Taking an advance on your salary will likely make your 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%.
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.
The Impact on Your Financial Health
Let’s return to that sneaker analogy. 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-income-ratio, hopefully you’ll come up with 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.
Write down all your expenses and see where you can cut back. The devilish thing about unsecured debt is that the less you pay on those bills each month, 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 that with expenses you can afford and simultaneously helps get rid of your debt.
The Great American Debt Mountain isn’t getting any smaller, but there’s no law saying you have to help it grow.
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
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