How much debt is too much? (2024)

Learn about debt-to-income ratios and if there truly is good and bad debt

How much debt is too much? (1)

Key takeaways

  • Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage.
  • A good debt-to-income ratio is less than or equal to 36%.
  • Any debt-to-income ratio above 43% is considered to be too much debt.

Debt-to-income ratio targets

Now that we’ve defined debt-to-income ratio, let’s figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.

How much debt is too much? (2)

The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment. The National Foundation for Credit Counseling recommends that the debt-to-income ratio of your mortgage payment be no more than 28%. This is referred to as your front-end DTI ratio. A 28% mortgage debt-to-income ratio would mean the rest of your monthly debt obligations would need to be 8% or less to remain in the “good” category.

How could you lower your debt-to-income ratio?

There are two primary opportunities to lower your DTI ratio: consolidating credit card debt and refinancing student loans.

Consolidating credit card debt could lower your monthly payments and spread repayment over years. Plus, it could save you big-time when it comes to interest since credit cards have much higher interest rates than personal loans or balance transfer credit cards.

Similarly, you could refinance your student loan if your monthly payment is too high. Refinancing allows you to extend the repayment term and therefore lower your monthly payment. Just make sure you’re comfortable with paying more interest over the life of the loan in exchange for this lower payment.

Is DTI ratio the only way to evaluate your debt?

No, it’s not. That’s because your debt-to-income ratio doesn’t take into account other monthly expenses, like groceries, gas, utilities, insurance, and cable/internet.

Do you want to see how debt fits into your bigger picture? Calculate how much leftover cash you have each month by subtracting your monthly debt obligations and other expenses/bills from your after-tax monthly income.

How much is left over? Ideally, you’d have a couple hundred dollars remaining to cover any unexpected expenses and put toward savings goals.

Sure, DTI ratio isn’t perfect, but it’s a good indicator that can help you evaluate your total debt.

Is there good and bad debt?

Yes, but how you define the two terms can differ. You could look at debt in one of two ways:

  1. Will borrowing this money make me money someday?
  2. Does it make sense to take money out for this reason?

Let’s consider the first perspective, which is the traditional interpretation of the “good or bad” debt question. What debt do you currently have or are considering taking on that could earn you a return on your investment? Your student loan is a good example; that loan helped you get your college degree, which helped you get your job and jumpstart your career. Your income is your return on your investment, hence the “good debt” label.

The same can be said for a mortgage — especially if your home’s value rises by the time you sell it — and any loans used to start a small business.

On the flip side, the traditional definition of “bad debt” is any money taken out to purchase an asset that depreciates in value. This includes auto loans and any goods or services purchased with borrowed money.

However, this thinking is very cut and dry. Consider the second perspective on good and bad debt: Does it make sense for me to borrow this money for this reason?

The answer to that question varies from person to person. For example, using a loan to fund your wedding could be “good debt” to take on if doing so:

  1. Helps you hold onto savings to buy a house in the near future, and
  2. You have enough free cash flow in your monthly budget to take on the monthly payment.

And one more thing: Don’t take on more debt for the sake of raising your DTI ratio. Yes, you want to show potential lenders your ability to carry and repay debt, but you shouldn’t take on more debt for the sake of getting closer to the 36% number mentioned previously.

What to remember

It’s hard to evaluate debt in a vacuum.

Debt-to-income ratio can be a good indicator, but since it doesn’t factor in your other monthly expenses, it can only tell you so much.

The same goes for the “good or bad debt” debate. It’s up to you to decide if taking on that debt is the best way for you to reach your goals in a financially responsible manner.

More information

Paying down debt could require a helping hand. Schedule a Citizens Checkup at your nearest Citizens Bank branch to get the advice you need.

How much debt is too much? (2024)

FAQs

How much debt is too much? ›

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.

What is considered a high amount of debt? ›

Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.

How much debt is too much for a person? ›

Generally, 36% is considered a good debt-to-income ratio and a manageable level of debt, as no more than 36% of your gross monthly income goes toward debt payments. If your DTI ratio is higher, it may be too much debt to handle.

How much debt is serious? ›

A good balance to aim for is about 35% or less. Anything higher than this could indicate that you have too much debt for the amount of income you earn. Another way to tell if you have too much debt is to pay attention to the way you manage money each month.

How much debt do you think is too much? ›

Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).

Is $5000 in debt a lot? ›

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month.

Is 30K in debt a lot? ›

The average amount is almost $30K. Some have more, while others have less, but it's a sobering number. There are actions you can take if you're a Millennial and you're carrying this much debt.

What is unmanageable debt? ›

Personal debt can be considered to be unmanageable when the level of required repayments cannot be met through normal income streams. This would usually occur over a sustained period of time, causing overall debt levels to increase to a level beyond which somebody is able to pay.

How much debt is too risky? ›

If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.

What is the 50 30 20 rule? ›

Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is considered extreme debt? ›

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.

How many people are debt free? ›

Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more. The exact definition of debt free can vary, though, depending on whom you ask.

How much credit card debt is ok? ›

The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.

How much debt is normal for your age? ›

Average Debt (Q1 2022)
18-25Average Debt (Q1 2022)$8,129
26-35Average Debt (Q1 2022)$16,832
36-45Average Debt (Q1 2022)$25,084
46-55Average Debt (Q1 2022)$31,442
4 more rows
Jun 2, 2022

How debt is ruining my mental health? ›

There's a strong link between debt and poor mental health. People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too. This is especially true if the stigma of debt is keeping you from asking for help.

Do a lot of people live in debt? ›

However, 35% of Americans reported that they're in the most debt of their lives. New York Fed data shows that U.S. household debt swelled to $17.5 trillion last quarter, with credit card balances making up about $1.13 trillion of it — a new high for credit card debt.

What is considered a bad amount of debt? ›

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.

Is 1000 dollars a lot of debt? ›

While that certainly isn't a small amount of money, it's not as catastrophic as the amount of debt some people have. In fact, a $1,000 balance may not hurt your credit score all that much. And if you manage to pay it off quickly, you may not even accrue that much interest against it.

How much debt does an average person have? ›

The average American owed $103,358 in consumer debt in the second quarter of 2023, the latest data available, according to credit bureau Experian.

Is 10k debt a lot? ›

There's no specific definition of “a lot of debt” — $10,000 might be a high amount of debt to one person, for example, but a very manageable debt for someone else. Calculating your debt-to-income (DTI) ratio gives you a rough idea.

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