At a Glance

Debt is completely normal. Total household debt in the U.S. reached $14.64 trillion in the first quarter of 2021, according to the Quarterly Report on Household Debt and Credit.

The average American has more than $90,000 in debt—including all types of consumer debt—according to a CNBC report.

But figuring out when you’re in over your head with debt can be subjective. Managing a large amount of debt will be easier to navigate for some than others. But how much debt is too much debt? Let’s break it down:

Figuring Out Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio comes into play in many loan situations, whether you’re applying for a credit card or a mortgage.

DTI is the amount of debt you owe on a recurring monthly basis divided by your gross monthly income. To calculate your DTI, you would add up the following:

  • Alimony and/or child support, if relevant
  • Monthly credit card bills
  • Monthly rent or mortgage payments
  • Any other loan payments (e.g., auto loan, student loan, personal loan)

Once you have the total, you’d divide that by your monthly income. So, if your total monthly debt is $2,000, and your monthly income is $6,000, your DTI would be about 33%.

This would be a good spot to be in. Most experts recommend keeping your DTI below 36% in keeping with the 28/36 rule, which states that no more than 28% of a household’s gross monthly income should go toward housing expenses, while no more than 36% should go toward total debt.

If you fall in the 36%-42% DTI range, you may want to consider implementing a repayment strategy like the debt snowball or debt avalanche method to get yourself in a more manageable situation. There have been many real-life debt snowball success stories from borrowers who got the motivation they needed to earn small victories.

If you’re in the 43%-50% range you may want to consider debt consolidation or contacting a credit counseling service.

And if you’re above the 50% mark, you’re considered high risk and may need to think about bankruptcy as a last resort if you’re not able to lower your debt load by other means.

Good Debt Vs. Bad Debt

I’ve run out of analogies for good debt and bad debt, but you can probably figure it out, right? Oh, you’ve come here for information? Well, fine.

What is good debt?

Good debt is a loan with a low, fixed rate that generally increases your net worth or boost your future value in some way. Examples include student loans, mortgages, and business loans. Give yourself a +1 if the loan is tax-deductible.

What is bad debt?

Bad debt is a loan with a high or variable rate that’s used to make purchases that won’t have long-lasting value—that new Tesla that you financed will significantly drop in value as soon as you drive it off the lot.

In addition to auto loans lasting five years or longer, bad debt also includes high-interest credit cards with revolving and growing balances and high-interest personal loans used to fund discretionary purchases.

How Much Credit Card Debt Is Too Much?

As with almost all forms of debt, the amount of credit card debt that’s “too much” really depends on your DTI. You could have $10,000 in monthly debt, but if your essential oils MLM company has taken off and you’ve reached “influencer” status on Instagram, raking in a whopping $30,000/month, your DTI still is around 33%. Of course, if you have $10,000 in monthly debt but are bringing in $15,000/month, your DTI would be about 66%, and you’d probably need to seriously consider filing for bankruptcy.

Other ways to know your credit card debt is probably “too much”

  • You’re using your credit card for cash advances
  • Your credit card balance isn’t going down even though you’re making regular payments
  • You rely on your credit card to make everyday purchases because you don’t have enough cash

How Much Student Debt Is Too Much?

Overborrowing is a common problem for those with student loans. Experts suggest avoiding taking on a loan that’s more than you expect to make in your first year in the workforce. In other words, if you think your starting salary will be $50,000/year, you shouldn’t borrow more than $12,500/year for a four-year degree.

The more advanced degrees you take on, the more complicated this gets, as you’re likely delaying your joining the traditional workforce and tacking on more tuition the longer you’re in school. But, on the flipside, if you’re planning to work in government or for a qualifying non-profit, you may be eligible for student loan forgiveness, which comes into play for your remaining federal student loan balance, assuming you’re eligible, after making 120 qualifying loan payments.

With the standard student loan repayment plan on federal student loans, you make equal monthly payments over the course of 10 years. If you’re feeling overwhelmed with federal student loan debt and your income isn’t high enough to make the standard payment, you may want to consider an income-driven repayment plan, like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).

If you have private student loans, you won’t be eligible for student loan forgiveness or an income-driven repayment plan. But that doesn’t mean you can’t make your student loan payments more affordable. If you have multiple private student loans, you could benefit from refinancing, assuming you have a good-to-excellent credit score or can count on a cosigner with a solid credit score to get you there. Student loan refinancing can potentially help you get a lower rate, lower monthly payment, or earlier debt-free date.

How Much Debt Is Too Much To Buy a House?

Again, experts suggest keeping your mortgage payment at or below the 36% DTI mark. But the 43% DTI mark is significant because it’s the highest DTI you can have to still be eligible for a qualified mortgage, according to the Consumer Finance Protection Bureau.

If you’re already a homeowner, but struggling to maintain your monthly mortgage payment, you could consider refinancing your mortgage by taking out a home equity loan, home equity line of credit (HELOC), or cash-out refinance.

And if you’re not a homeowner but want to be, maybe you should reconsider. I know our parents and their parents and their parents’ parents all bought homes as a savvy investment and in an attempt to achieve the “American Dream.” But with home prices on the rise because of COVID-19 and the housing demand blowing away the housing supply, you might be better off as a long-term renter. Just one more reason for Boomers to rip millennials for their “failures.”