Updated: May 18, 2023

How to Determine If You Have Too Much Debt

Pay attention to the warning signs that you may be carrying to much debt. Determining how much debt you have will allow you to build a debt management plan.
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There is no one yardstick for how much debt a person ought to have, but there are a number of ways of determining if you've taken on more than you can handle. The best method is to calculate your debt-to-income-ratio. Ideally, your DTI should be below 10 percent. To quickly figure out whether it is or not, calculate your monthly net income -- after taxes, 401(k) contributions, insurance and other deductions -- and take a zero off the end. You should be spending no more than that amount -- one tenth of your monthly net income -- on your debt load, at least your "bad" debt load.

Obviously, people can't reasonably expect their mortgage payments to be less than 10 percent of monthly net income, which is why we make this "good debt" and "bad debt" distinction. (Side note: your mortgage or rent shouldn’t account for more than one-third of your monthly income.)

That said, credit ratings agencies determine your creditworthiness, at least in part, by looking at your current debt load compared to how much credit is available to you. So if you've maxed out all your credit cards, you won't look attractive to creditors, even if your DTI is healthy. To a lender, you look like someone who doesn’t plan on paying back the money they lend out -- that’s not a good look to have.

Read: Should I consolidate my debt?

How much debt you ought to be carrying is absolutely situational, and abides by common sense principles. If you want to take out a big loan in the near future, you should be carrying very little debt. Not only will your credit score be higher if you have little debt on your balance sheets, but adding new debt to old debt makes it highly unlikely you’ll pay either back in a timely fashion, and you’ll end up paying for it in interest payments and late fees.

Your debt load, even if it’s manageable for you, can affect the structure and nature of your debts in the future. Ultimately, it might come down to what you're comfortable with. So long as you're able to pay down your balances every month, and still meet basic necessities without plunging yourself further into debt, you're probably in good shape.