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How Much Debt Is Too Much Debt?

by Christy Bieber | May 27, 2019

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Stack of bills labeled past due and account closed

Image source: Getty Images

Being in debt is very common. In fact, most Americans have at least some of kind of debt, whether that's personal loan debt, credit card debt, mortgage debt, or a combination of different kinds of debt.

Owing some money isn't necessarily a bad thing. After all, if you fund an education or borrow to start a business or buy a home, those activities should eventually cause your net worth to grow.

But, while it can make sense to take on some debt, you definitely don't want too much of it, as you could find yourself in a financial disaster. That brings up an important question: Just how much debt is too much?

How much debt is too much?

While it's OK to borrow some money, you've got too much debt if the money you owe is interfering with your ability to accomplish financial goals. If your debt payments are so substantial that you can't invest for retirement, save for emergencies, or do other things with your money, then you have too much debt.

If you can't pay your bills at all, this is a clear sign that you're in over your head and need to deal with your debt problem. However, it's possible to have too much debt even if you're able to make your payments if those payments take up too large a percentage of your income.

Most experts recommend keeping your consumer debt, such as credit cards, car loans, and other loan payments below 20% of your monthly take-home pay. When you add in mortgage debt, this number can go higher -- but your debt still shouldn't take up too much of your take-home pay.

Mortgage lenders typically look at your debt-to-income ratio, which is the total amount of monthly debt payments (including housing costs) relative to your gross monthly income. If this debt-to-income ratio exceeds 43%, you're considered to be too over-extended and probably won't get a mortgage.

Finally, when your credit score is calculated by the major credit reporting agencies, your credit utilization ratio is a factor. If you've used more than 30% of your available credit, your credit score will be lower because of it.

Remember though, all these ratios are maximums. Many financial advisors would argue that having any high interest debt -- like credit card debt -- is a bad idea because you're wasting money paying interest on assets that don't increase in value.

What about good debt?

While credit card debt and other debt for depreciating assets -- such as car loans -- are not great to have, there are some kinds of debt that are considered good debt.

Mortgages, for example, are considered good debt because they help you to make an investment in your future. You build equity in your home, so borrowing makes sense.

Just because mortgages can help you in the long run doesn't mean you should borrow an excessive amount of money. It makes no sense to borrow for a home you can't really afford, as doing so would put you at risk of foreclosure or leave you house-poor and sinking all your money into your home. 

Typically you should keep housing costs to no more than 30% of your income. If your mortgage payments, combined with property taxes and insurance, exceed this amount, you should buy a cheaper house.

Keeping your debt low is always best

Borrowing money always costs money, and the more of your monthly income that goes to paying interest, the less you have to do other things. Whenever possible you should keep your borrowing to a minimum and keep your debt balances low. If you stick to only taking on "good debt" and you keep the amount of good debt reasonable, you'll be in a much better financial position than if you've got big credit card bills to contend with.

These savings accounts are FDIC insured and can earn you 12x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.

Two top online savings account picks

Rates as of Dec. 29, 2020 Ratings Methodology
Logo for CIT Bank Savings Builder
Logo for American Express® High Yield Savings Account
CIT Bank Savings Builder American Express® High Yield Savings Account
Member, FDIC Member, FDIC
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Open Account

On CIT's Secure Website.

Open Account

On American Express' Secure Website.

Read Review Read Review

APY: Up to 0.45%

APY: 0.50%

Best For: No monthly maintenance fee

Best For: High APY

Min. to earn APY: $25k or $100 monthly deposit for highest tier

Min. to earn APY: $0

About the Author

Christy Bieber
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Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.

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