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How much debt is too much debt?

How can you determine if you are getting into too much debt? A good benchmark to use is your debt-to-income ratio (DTI). This ratio compares the amount of money you pay toward debt and the amount of money in your take-home pay. Learn how to calculate this ratio and see how much debt you can safely handle.

How to calculate your debt-to-income ratio

Start by calculating your monthly household debt payments. Remember that debt is only the payments you make to repay a lender for money that you've borrowed. Examples include credit card debt, auto loans, student loans, medical bills, or any other debt you are making a monthly payment on. Your home mortgage payment is not included in your debt-to-income ratio.

Next, calculate your monthly take-home pay (this is your net income). Then divide the total debt payments per month by your monthly net income. You will likely get an answer that equals less than one (such as 0.35 or 0.23). Now, multiply this number by 100 to see the percentage of your take-home pay that goes to pay down debt (for example, .35 x 100= 35%). 

Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%). The $350 of debt is 14 percent of the $2,500 monthly income.

How to use your debt-to-income ratio

The DTI helps you understand how much debt you currently have and how much more you can safely take on. Use this formula before deciding whether to make a new purchase using credit. For example, if you estimate that an extra $50 in monthly credit card payments will increase your DTI above 20 percent, you may want to wait to buy that new item until your net income goes up or your total monthly debt payment goes down.

Remember, not all debt is bad! Some debt, such as student loans are necessary.  Understanding your DTI assists you in being a smart borrower so you can be an informed borrower and not have too much debt.

Revised by Sharon Powell, Extension educator in family resiliency

Reviewed in 2023

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