If you're like many Americans who've seen their debts rise in the last year, you might be wondering if your payments are unsustainable — and what you can do about it.
If you have a lot of debt, you're not alone: The average debt balance, including big-ticket items like mortgages, student loans and auto financing, climbed to $101,915 in 2022, per credit bureau Experian's most recent data. For just credit card debt, the average amount is $5,910. For just student debt, it's $39,910.
But the amount of the debt matters less than your ability to pay it off. A low 3% interest rate on a student loan or mortgage would likely be easier to tackle than credit card balances with interest rates over 25% that swallow up every spare dollar. Your income also plays a role in your ability to pay off debt.
How much debt is too much debt? Here are six signs it's out of control.
1. You can't save for an emergency fund
One of the foundational building blocks of personal finance is a cash buffer for emergencies, known as an emergency fund. Certified financial planners typically recommend putting away enough to cover three to six months of expenses, although any amount of savings can help.
Ideally, you'd be able to save up for an emergency fund before tackling other goals, but some obligations, such as paying down high-interest debt, should be priorities too. Low-interest debt, like student loans, may be less of a priority if you can easily afford the minimum payments.
If you aren't able to add anything to your emergency fund while covering your minimum debt payments, your debt burden is probably too high to comfortably manage.
2. You can only afford to make minimum debt payments
Only making minimum payments can be a sign that your debt burden is unsustainable.
One reason is because if minimum payments are all you can afford, you'll be more vulnerable to unexpected costs pushing you further into debt.
Plus, if you only make the minimum payment each month, not only will it prolong the time it will take to pay off the outstanding balance, it will increase the total amount of interest you pay on the loan.
Interest can add up quickly. For a credit card with an interest rate over 20% and a balance of a few thousand dollars, the amount you'd spend on the balance plus interest would be more than double the original balance if you only made the minimum payments each month.
3. You've been denied for new credit
If you're denied for new credit, it could be a sign that you're not able to manage the debt you already have.
Loans and credit cards are usually denied because the applicant's credit score is too low. Low credit scores tell lenders which borrowers are at risk of defaulting on loans or who have a history of not making minimum payments on time.
When you're rejected for new credit, it limits your short-term financial flexibility, which can burden you with more debt.
4. You're opening new credit card accounts to help pay for older ones
One way to pay down credit card debt faster is through a balance transfer card that offers a 0% interest rate for a limited time, usually 12 to 21 months. Balance transfers are what they sound like: You move your outstanding debt balance from an old card to a new card, and with 0% teaser interest rates, you don't have to worry about interest payments, at least for a while.
There are some downsides, however: Balance transfers require credit checks that can hurt your credit score and usually have fees of 3% to 5%, which can add to your debt burden. Plus, you can be rejected for low-interest balance transfer offers if your credit score is too low.
And balance transfers only provide temporary relief — you'll have to pay off that debt eventually.
Ultimately, "if you're opening low or no-interest rate credit cards to pay off other ones, you probably have too much debt," says Noah Damsky, a chartered financial analyst at Marina Wealth Advisors in Los Angeles.
5. You're consistently late paying your bills
If you're consistently late paying bills because you can't afford them, that's a tell-tale sign your debt is getting out of control.
Similarly, if you're consistently withdrawing from retirement savings or using a credit card to cover bills, you probably need to reassess your finances.
6. Your debt-to-income ratio is above 36%
The higher your debt-to-income ratio, the more of your earnings go toward debt. By having a significant portion of your income tied up, you have less flexibility to cover unexpected or emergency expenses.
To calculate your debt-to-income ratio, tally all of your monthly debt payments and divide that total by your monthly income, after taxes.
Lenders like to see debt-to-income ratios lower than 36% when considering applications for loans, so it's a good benchmark to use when looking at your budget, although "the lower, the better," says Tim Melia, a CFP with Embolden Financial Planning.
What to do if you have too much debt
Whatever your debt total, your ability to eventually pay it off will depend on "decreasing discretionary spending or increasing income," says Melia. Most people probably have more flexibility in reducing discretionary spending, unless you can get a raise at work or start a part-time job.
Either way, the first step is to review your bills and loan statements and determine what you pay for needs like shelter or food, discretionary spending and debt payments. By creating a list of your expenses, you might be able to identify areas you can decrease or eliminate, says Melia.
Another option is to contact your lenders and credit card providers and ask for leniency based on hardship. This could result in forbearance, reduced interest rates or waived fees.
Beyond that, you can contact non-profit credit counseling organizations to help you straighten out your finances. They can arrange a consolidated "debt management plan" between you and card issuers or lenders, which can result in a single, lower payment for all of your debt.
Similar to a repayment plan is debt settlement, which would be done using a for-profit company, although there are pros and cons to consider before choosing that option.
A last resort might be declaring bankruptcy, but you'll want to consult with a credit counselor or financial planner before deciding, as it has long-lasting consequences.
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