How much debt is too much? Three checks you can run

Why one number cannot answer this

Two people can both owe $20,000 and be in completely different positions. One has a $9,000 salary a month and a 4% car loan. The other has a $3,200 salary and three credit cards at 24% APR. A single total tells you almost nothing about whether the debt is manageable. The three checks below look at debt relative to income, relative to cash flow, and relative to whether it is actually going down.

Check one: your debt to income ratio

Add up your minimum monthly debt payments, including rent or mortgage, credit cards, loans and any court-ordered payments, then divide by your gross monthly income. A ratio that has been climbing over the last year, or that leaves very little room for savings, is a signal even without a hard cutoff. Lenders use this ratio to judge how much more you can safely borrow, which is a reasonable lens to borrow for judging your own situation too.

Check two: minimums against take-home pay

Debt to income uses gross pay, but your bills come out of take-home pay. Add up your minimum payments and compare them to what actually lands in your bank account after taxes and deductions. If minimums alone eat a third or more of that number before groceries, transportation and housing, you are carrying more than your cash flow comfortably supports, regardless of what the gross ratio says.

Check three: is the balance actually falling?

This is the check people skip. Look at your total debt balance from three months ago against today. If it is flat or higher despite regular payments, your payment is not beating the interest being added, or new charges are offsetting your progress. A high-APR card can grow even while you pay the minimum every month, so this number matters more than whether you feel like you are trying.

1. Pull your total balance across all debts from three statements ago.
2. Compare it to your current total balance.
3. If it is flat or higher, calculate one month of interest on your largest balance to see why.
4. Decide whether to increase a payment, target the highest-APR debt first, or both.

Reading the three checks together

One weak check is worth watching. Two weak checks at once, for example a high debt to income ratio and a balance that is not moving, is a stronger sign that the current plan needs to change rather than just continuing on autopilot. None of these checks require a specific threshold to be useful. They just need to be run honestly and looked at side by side.

Common questions

Is there a debt to income ratio that is considered safe?

Lenders generally view a lower ratio as stronger, but there is no single number that applies to everyone in every situation. Your income stability, other savings and expenses all change how much room you actually have.

What if my balance is falling but very slowly?

Slow but steady progress is a different situation than a flat or rising balance. It may just mean a larger payment or a rate check on your highest-APR debt would speed things up, not that the plan is broken.

Should I include rent or a mortgage in these checks?

Include it in your debt to income ratio, since lenders do. For the balance-trend check, focus on debts that carry a balance and interest, since rent does not shrink the way a loan balance does.

What should I do if two of the three checks look bad?

Start by finding out where interest is outpacing your payments, then look for room to raise a payment or free up cash flow. A nonprofit credit counselor can also help you look at the full picture.