Inflation has been doing nobody any favors over recent years. You’ve certainly noticed the grocery bill getting larger. Has your credit card balance increased with it?
There are many reasons you may find yourself in debt. It’s easy to think of as a temporary setback, but it can become a permanent resident if you’re not paying attention. Steep interest rates make getting out of debt much harder.
So how much debt is too much? Let’s look at some warning signs to help you identify when things are getting out of hand—and what you can do about it.
How much debt is too much?
There is no single dollar amount that indicates too much debt. There are multiple factors specific to each individual that determine this answer, including income, expenses, type of debt, and unique financial goals.
Think about how your debt fits into your finances. How much of your income goes towards satisfying your debt each month? How much interest are you paying? What is the purpose of your debt? Does the debt help or hurt your long-term objectives?
For example, there’s no upside to having a high credit card balance; but having a $300,000 mortgage serves as an investment and adds to your net wealth as you build home equity.
All to say, there’s much more to examine than just your outstanding balances. But we’ll get into some red flags you should watch for if you’re concerned your debt might be crossing a worrisome threshold.
Signs your debt is crossing the line
If you’re wondering whether you’ve already got too much debt, that alone can be a warning sign. Here are some additional factors to consider to help you better understand whether your debt is getting away from you.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is one of the best metrics to gauge whether you’ve got too much debt. It compares how much you earn to how much is committed to debt payments each month.
For example, let’s say you make $90,000 per year and you pay the following debts each month:
- $350 toward an auto loan
- $2,200 toward a mortgage
- $900 toward credit card balances
To calculate your debt-to-income ratio, take your total monthly debt payments ($3,450) and divide that by your gross monthly income ($7,500). That amounts to a DTI of 46%.
Typically, you’ll view your DTI through this lens:
- 35% or less: Good
- 36% to 49%: Needs improvement
- 50% or more: Needs immediate attention
Even if most of your debt isn’t “bad” (for example, a mortgage), you can still undermine yourself by taking on too much financial responsibility.
Your income may not suggest that a high debt-to-income ratio is a bad thing. Those who earn a lot of money may find themselves with many thousands of dollars in discretionary income each month, even with a DTI breaching 50%. A big reason to keep this as low as reasonably possible is to protect yourself from an unforeseen disaster, such as job loss. The inability to add money to your savings can also mean that you’re juggling too much debt.
You need credit to stay afloat
Can you buy all your monthly essentials without needing to float the payment? If your credit card balances are growing from spending on things like groceries, gas, utilities, etc., this can mean that you’ve got too much debt.
Of course, this can also show that you’re simply living above your means. You may not have too much debt at the moment, but you’re currently spending too much—which will very likely lead a debt problem down the road.
Struggling to make minimum payments
On a similar note, if you’re finding it difficult to make minimum payments each month, take that as a cue that you’ve got too much debt. A strained budget that can be relaxed by eliminating monthly obligations such as credit card balances carried month-to-month, personal loans, auto loans, etc. means your debt is directly impeding your ability to move forward financially.
Using new credit to pay old debt
When you begin borrowing money just to repay funds you’ve already borrowed, you’ve got too much debt. It underscores the fact that you aren’t able to afford payments with your current income.
For example, you may take out a cash advance from one credit card to make payments on another. Or you may pay your mortgage or rent with a credit card via a third-party service.
That’s not to say using credit to pay old debt is always a bad idea, as strategic debt consolidation can be a powerful tool for getting out of the red—but it’s a clear warning sign that something has to change.
Why people end up with more debt than they can handle
Nobody sets out to rack up as much debt as possible. There are plenty of reasons why this situation can happen. The following scenarios are common.
Impulse spending
Perhaps the most insidious cause of too much debt is the spontaneous purchases at the grocery store, coffee shop, Amazon browse, etc. Small buys that individually have little impact on your budget but quickly combine to devastate your credit card.
High-interest balances that quietly snowball
You may think that the ability to stay current on all your bills means you can afford to carry a balance on a credit card. But interest payments can put you in a spot that makes it extremely difficult to make progress on lowering the debt you accrue. Many credit cards charge annual percentage rates north of 20%.
Unexpected setbacks
It’s possible you’re staring at considerable debt that’s resulted from a disaster like a medical emergency, job loss, or another event that’s outside your control.
You’ll ideally be able to weather incidents like these with substantial savings. Again, if you’ve been unable to contribute meaningfully to a savings account, that may intimate a debt issue.
What to do next if your debt is already too high
So you’ve identified that you’ve got too much debt. What do you do next? Here are a few steps you can take to right the ship.
Analyze your budget and adjust your cost of living
The first step to healing your debt situation is to take stock of all your vital monthly expenses—as well as your minimum debt payments—and subtract them from your monthly net income. You’ll then know exactly how much extra you can throw toward your existing balances. Two popular options are the snowball and avalanche debt repayment methods.
If you don’t have any money to spare, you may need to investigate ways to boost your income. The simplest way to do this may be with side hustles. From driving for Uber to delivering with DoorDash, there are plenty of ways to make money on the side until you’re in a better place.
Debt consolidation loan
A debt consolidation loan is a personal installment loan that you can use to repay multiple smaller balances. This lowers the number of monthly payments you must meet by rolling them into a single larger payment—though often smaller than the sum total of what you were previously paying each month on multiple loans.
Debt consolidation loans often have much lower interest rates than credit cards, so you may save considerable money from the black hole of APR with this method. Just beware of other personal loan costs, like origination fees and administrative fees.
Balance transfer credit card
Another way to effectively consolidate your debt is to open a balance transfer credit card and relocate several debts onto a single credit card. Many balance transfer credit cards also offer 0% intro APR for over a year, giving you the chance to quickly pay down the principal without a portion of your money being channeled toward interest.
One quick note: You can only consolidate as much as your balance transfer card’s credit line can accommodate (including the balance transfer fee). If your credit score only allows for you to be approved for a credit limit of $5,000, it may not be very effective to consolidate $20,000 in debt.
In addition, a balance transfer credit card is typically only helpful for those with a good credit score (think 670 or above), as issuers usually won’t approve applicants with poor or fair credit for these cards.
Negotiate with your creditors
Banks are not relief organizations; they’re for-profit establishments that want to make money from you. They are also interested in you repaying your debts in full.
It’s sometimes possible to get improved repayment terms, such as a reduced interest rate or lower monthly payment, by reaching out and asking. If the financial institution thinks it’s most likely that you’ll repay your debt with a bit of aid, they’ll sometimes do it.
It won’t even affect your credit score—but you may find notes on your credit report stating that you’re taking part in a hardship program. This can make other lenders wary, giving you a harder time being approved for other things. But if it helps you to get out of debt, it’s almost certainly worth it.
When to bring in outside help
If none of the above seems to get you any close to debt-free, it could be time to ask for help.
Credit counseling and debt management plans
Credit counselors from nonprofit organizations can help you to identify a path out of debt. If you and they decide that a debt management plan (DMP) is necessary, they’ll help to set you up. A DMP combines your unsecured debts into one payment (similar to a debt consolidation loan), often giving you lower interest rates.
With a DMP, you’ll typically be required to close credit cards that you’re rolling into the plan. This can affect your length of credit history and credit utilization, which can lower your credit score for a time. Again, this is a minor sacrifice for living debt-free.
Debt settlement and bankruptcy
More extreme than a debt management plan is debt settlement. This is the act of agreeing with your creditors a repayment figure smaller than what you actually owe. Debt settlement companies usually ask you to stop making monthly payments and allow your loans to slip into delinquency. This gives them leverage when negotiating with your lenders.
Debt settlement will tank your credit score, and it can result in collections calls and even lawsuits before you formally settle. It’s not the ideal route, but it may be the only way if you feel that there’s no way out of the quicksand.
Bankruptcy is also a form of debt settlement in that it erases many unsecured debts (eligible personal loans, credit card balances, medical debt, etc.). This appears on your credit score for up to 10 years, and it’s guaranteed to ruin your credit score for a long time. It may even result in a loss of personal property, including home equity, to satisfy your lenders.
How to choose a reputable debt relief company
If you’re in the market for debt relief help, make sure the one you choose is reliable. There are many predatory companies out there that take advantage of those desperate for solutions and abnormally willing to believe unrealistic promises.
Focus on details such as:
- Customer reviews: Stick with companies that have a high volume of reviews—and respectable star ratings. This is perhaps the most valuable measuring stick, as you can read unbiased experiences from customers like you.
- Accreditation: If the company you’re considering is part of the IAPDA, ACDR, NFCC, or FCAA, you’ll feel confident that you’re not being scammed. These credentials mean the companies are required to abide by industry standards and ethical practices.
- Transparent fees: Any company that obscures its fees probably has something it doesn’t want you to know. Also remember that a legitimate debt relief company won’t ask for upfront payment before your debts are settled.
Read our guide to the best debt relief companies to quickly find the best (and most reputable) option that’s suited to your situation.
The takeaway
If you’re concerned that you have too much debt, chances are you do. Not all debt is bad, but having too much of any debt can seriously hamper your financial goals and undermine your budget. Increasing credit card balances, difficulty making the monthly payments to keep your accounts current, and using new credit to pay the bills for old credit are all telltale signs.
But all hope is not lost. From debt consolidation to negotiating with creditors to enrolling in a debt management plan, there’s a solution for whatever situation you’re in. Getting out of debt can take a lot of work—but it’s worth sticking with the program.
Frequently asked questions
What debt-to-income ratio is considered too much debt?
A debt-to-income ratio of 50% or more is considered too much debt. You should take immediate (drastic, if necessary) steps to lower it.
Can I have too much debt even if I never miss payments?
You can have too much debt even if you never miss payments. The fact that your accounts aren’t delinquent doesn’t guarantee that you’re living below your means. It just means you’re treading water at the very least.
What happens if I keep making only minimum payments on my debt?
If you keep making only minimum payments on your debt, you’ll end up losing a lot of money in interest. This is especially true for high-APR credit cards, which could take many years and tens of thousands of dollars in interest to pay off, depending on your balances.
What should I do first if I realize I have too much debt?
When you first realize you have too much debt, the first step is to audit your finances to see where your money is going. You can then decide which purchases are essential and which can be redirected toward paying down your balances.
When should I consider debt consolidation to manage too much debt?
You should consider debt consolidation when you’re making multiple monthly payments on accounts with high interest. Opening a debt consolidation loan can lower the total amount you pay each month in minimum payments, and it can reduce the APR you’re subject to.
