How much debt is too much?
You want your debt to be as low as possible so you can remain financially flexible for both emergencies and your future goals.
When you struggle to make monthly payments, you’re likely hitting your debt capacity.
How much debt is a lot?
The Consumer Financial Protection Bureau recommends you keep your debt-to-income ratio below 43%. Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments.
The highest ratio you can have and still be able to obtain a qualified mortgage is also 43 percent. If you want to purchase a house soon, and a monthly mortgage payment would push you past 43%, you should lower your debt before you start house hunting.
How do you calculate your debt-to-income ratio (DTI)?
To calculate how much your debt is affecting your monthly finances, take your total monthly debt and divide it by your monthly income. However, your debt doesn’t include all of your monthly expenditures but does include the following:
Monthly credit card payments
Alimony
Child support
Monthly rent or mortgage payment
Loan payments (such as student loans and auto loans)
Things that shouldn’t be calculated as part of your DTI include:
Internet
Cable
Electricity
Gas
Cell phone
Insurance
Monthly subscriptions
Groceries
If your monthly income is $3,000 and your monthly debts are $1,000, your DTI would be 33 percent ($1,000 / $3,000 = 0.33). That is a good number to be at and isn’t considered too high by lenders.