Our best debt consolidation loans can provide options when managing multiple financial obligations.
But too much debt can create major problems for your finances. It can damage your credit score and make it less likely for creditors to loan money to you. And if you struggle to pay down your balances or make your payments on time, you could quickly wind up trapped.
This article will help you identify warning signs of excessive debt and explore effective solutions.
How Much Debt Is Too Much?
There is no single definition of how much debt is too much. It depends on several factors, including your income, the amount you owe, and your other financial obligations.
The key is understanding whether your debt is working for you or against you. Is it helping you build wealth or preventing you from meeting your basic needs and future objectives?
How to Evaluate Your Personal Debt Load
Start evaluating your debt load by considering your debt-to-income ratio (DTI) and whether you have "good debt" or "bad" debt.
Debt-to-Income Ratio
DTI is a powerful financial metric that lenders use nationwide to evaluate credit applications and determine borrowing capacity. More importantly, you can calculate your DTI to assess whether your current debt level is sustainable.
"Simply put, debt-to-income (DTI) ratio is the percentage of your monthly gross income that goes toward paying debts, including credit cards, loans, and mortgages. It helps measure your ability to manage debt relative to your earnings," says Kristy Kim, CEO and founder of TomoCredit, a financial wellness platform that helps immigrants and other underserved groups access credit.
How to calculate your DTI:
- Add up all your monthly debt payments (credit cards, loans, mortgages)
- Divide that total by your monthly gross income (before taxes)
- Multiply by 100 to get your percentage
For example, if you pay $2,000 in monthly debt payments and earn $6,000 monthly, your DTI is 33%.
"Ideally, you should keep your DTI under 36% for better financial stability, though lenders may allow up to 43% for mortgage approvals," Kim explains. "A lower DTI gives you more flexibility, reduces financial stress, and helps ensure you can manage unexpected expenses or job changes without falling into financial trouble."
Good Debt
Another way to think about your debt is whether you have “good debt” or “bad debt.” Whether a debt can ever truly be good is open to interpretation, but people may classify debt as good when it creates value or contributes to their financial future. Examples of good debt can include:
Mortgages: Homes tend to increase in value, which means you can use a mortgage to build ownership in property that appreciates, rather than devalues, over time, and could give you a big payoff if you decide to sell it.
Student loans: If you can use your college degree to get a better-paying job and earn more money over your lifetime, borrowing a student loan to fund your education may be worth it.
Business loans: Businesses often require large investments to get started, and can require additional funding as the business grows. If a loan helps you create a business or maintain your company’s success, the loan could be considered good.
Debt you can easily afford: “‘Good debt’ refers to manageable debt that you can easily pay off and strategically use to build credit, such as a small loan or credit card balance that you pay on time. Debt can be used as a financial tool to help you get ahead. It helps establish a positive payment history and improve your credit score,” says Kim.
Keep in mind, these types of loans are not objectively good. Any loan that would cause you financial hardship should be avoided, regardless of the reason you're using it. Always take care to borrow within your means.
Bad Debt
When people refer to bad debt, they generally mean debt that doesn’t provide any kind of financial value. Types of bad debt may include credit cards, auto loans, personal loans, and more. Calling all these types of debt “bad” may be a bit of an oversimplification.
Examples of potentially problematic debt include:
- High-interest credit cards: When balances roll over month to month, interest compounds rapidly, making purchases significantly more expensive than their original price.
- Payday loans: These short-term loans offer quick funding but can carry fees equivalent to interest rates approaching 400%, according to the Consumer Financial Protection Bureau, creating cycles of dependency.
- Auto loans for rapidly depreciating vehicles: Cars typically lose 20-30% of their value in the first year alone, meaning you could end up owing more than the vehicle is worth.
- Personal loans for non-essential purchases: Borrowing for vacations, electronics, or luxury items adds interest costs to things that don't generate financial returns.
However, context matters significantly. A car loan that enables you to commute to a higher-paying job might be financially beneficial despite the vehicle's depreciation. Similarly, a personal loan used to consolidate higher-interest debt could save money over time.
The true measure of whether debt is "bad" often comes down to three factors: the interest rate, whether the purchased item retains/builds value, and how the debt affects your overall financial health.
5 Warning Signs of Too Much Debt
Common warning signs that you have too much debt include:
1. You Struggle To Afford Your Monthly Payments
One of the biggest signs of too much debt is when you can't afford your monthly payments. If you don't have enough income to pay the bills—or if you have little left over for anything else—this is a red flag that you have too much debt.
2. You Can't Keep Track Of Your Debts
Too many debts can get overwhelming—Maybe you have trouble remembering how much you owe and to whom. Or, maybe you can't keep track of all your payments and due dates. Either way, this could be a sign that you need to work on simplifying your debts.
3. You Can't Save For The Future
Paying off your debts over time should be one of your primary financial priorities. But when you can't save for other financial goals, such as an emergency fund, a down payment for a house, or a retirement account, you might have too much debt.
"If your debt payments take up a large portion of your income, and you never seem to be able to pay anything down and [it's] leaving little room for savings or emergencies, it may indicate financial trouble," says Kim.
4. You Have Late Payments Or Accounts In Collections
Late payments can cause major financial issues. If you don't pay your bills on time, you can wreck your credit score. Eventually, late payments can get sent to collections, and you'll start getting calls from debt collectors.
You could even get sued for unpaid debts and have your wages garnished. Late payments are a big indicator that something is wrong.
5. Your Debt Isn't Shrinking
You may struggle to reduce your overall debt when you have too much of it. If you can only make the minimum payments every month, a lot of your payment could simply go toward the interest and not do much to shrink your balance (depending on the interest rate and the type of debt).
This can cause a perpetual cycle of debt, where you can't make meaningful progress toward debt reduction.
How to Lower Your Debts
Common strategies that borrowers use to reduce debt include:
Debt snowball method: Focus on paying off smaller debts first while maintaining minimum payments on others. Once the smallest is eliminated, apply that payment to the next smallest debt.
Debt avalanche method: Target the debt with the highest interest rate first, while making minimum payments on the others. After eliminating it, redirect those funds to the next highest-interest debt.
Consolidate your debt: Combine multiple debts into one monthly payment using options like personal loans, balance transfer cards, home equity products, debt settlement services, or debt management plans.
Negotiate your debt: Contact creditors directly to request a lower payoff amount or an alternative repayment plan if you're struggling. Many are willing to work with you rather than risk non-payment.
“If you go the debt consolidation route, make sure to avoid taking on new debt, opening new credit cards, and instead focus on consistent, steady payments to gradually regain financial stability (and in many ways, get your life back),” says Kim.
Bottom Line
Understanding your debt burden is the first step toward financial control. By recognizing warning signs early and implementing appropriate debt reduction strategies, you can gradually transform overwhelming obligations into manageable payments.
Remember that seeking help through debt consolidation or professional financial advice is a smart step toward lasting financial freedom.
Frequently Asked Questions
How much credit card debt is too much?
There is no specific amount of credit card debt that is too much. However, it's recommended to keep credit card balances below 30% to avoid damaging your credit score. If you have trouble making your monthly payment, you might have too much credit card debt.
How much student loan debt is too much?
No set amount of student loan debt is too much. But if your student loan payment takes up too much of your monthly income and you can't afford to pursue your other financial goals, you might have too much student loan debt.
How much mortgage debt is too much?
Whether you have too much mortgage debt depends on several factors, including the amount you owe, your income, and the size of your monthly payment. Experts often recommend that no more than 28% of your gross monthly income should go toward housing.
