What Is a Reasonable Amount of Debt? This Rule Can Help You Know (2024)

FAQs

What Is a Reasonable Amount of Debt? This Rule Can Help You Know? ›

Key takeaways

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%).

Use the 15 to 20% rule.

Your total debt load (except for your mortgage payment) should not exceed 15 to 20% of your monthly, after-tax income. Caution: This maximum may still be too high for some families, such as those with an uncertain job future, low income, high rent, or a high mortgage payment.

Total debt-to-income-ratio – This identifies the percentage of income that goes toward paying all of a person's recurring debt payments (including mortgage, credit cards, car loans, etc.) divided by gross income. This should be 36% or less of gross income, though some lenders will go as high as 43%.

If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.

The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.

The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Rule of thumb #2: loan payments should be less than 10% of your gross income.

How much debt is too high? ›

Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.

Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.

Good debt—mortgages, student loans, and business loans, steer you toward your goals. Bad debt—credit cards, predatory loans, and any loan used for a depreciating asset—steers you away from your goals. With debt, moderation is key; even good debt, when overused, can turn bad.

In the golden rule, a budget deficit and an increase in public debt is allowed if and only if the public debt is used to finance public investment.

Debt rule: a country is compliant if the general government debt-to-GDP ratio is below 60% of GDP or if the excess above 60% of GDP has been declining by 1/20 on average over the past three years.

The debt ceiling, or the debt limit, is the maximum amount that the U.S. government can borrow to meet its legal obligations by issuing bonds. If the Treasury Department can't pay expenses when the debt ceiling is reached, there is a risk that the U.S. will default on its debt.

U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.

“No matter what your income, $100,000 in debt is a very significant amount. The first step to take is to acknowledge it is a problem and that you need to take action now; it's not going to disappear on its own.”