We all have our own set of individual financial circumstances, therefore the answer to the question of how much debt is too much debt will differ for all of us. However, there are a number of strategies you can use that will help you identify how much debt is too much debt for you.

Your Personal Debt Capacity

One of the easiest ways to calculate when you have too much debt is to calculate your own personal debt capacity. Your personal debt capacity is the amount of money you can borrow and pay back during a particular period without any financial difficulty. If you know your own personal debt capacity based on your circumstances, this will help you in the future when it comes to considering whether you can afford to apply for further credit and meet the repayments.

To calculate your own personal debt capacity, sit down and come up with your own personal budget. Use our blog on Budgeting Success Methods or explore the whole Budgeting and Money Management section of the NOW FINANCE blog if you need assistance.


Once you have worked out your budget you will be left with a disposable income figure. This is the money that you could then use to meet any debt repayment obligations. Depending on your circumstances, it might be worth using only a portion of your disposable income for debt repayments rather than committing all of it towards the repayments, as this will give you some room for flexibility if your circumstances change, and also because it is difficulty for any household to realistically eliminate all discretionary spending for an extended period of time.

If you suddenly find yourself using debt to cover everyday living expenses, then you may be at risk of entering a bad debt cycle

Using Your Disposable Income Figure to Calculate Debt Capacity

Let’s say you have a disposable income figure, that you’re happy to commit to debt repayments, of $500 per month. This would mean that your personal debt capacity is potentially a loan amount that has repayments of up to $500 per month (after factoring in interest and fees).

Why do we use the word potentially? The reason is because if you borrow the maximum amount you can afford according to your debt capacity, you are likely repaying principal of a low level. Borrowing less enables you to make extra repayments, reducing the principal (and the accrued interest) faster so you ultimately pay less. It also allows you a buffer for discretionary or emergency spending.

Should I Just Avoid Debt?

Avoiding debt, or trying to avoid debt, is an approach many people take. However, for those who do not have significant savings it is often difficult to do so. One benefit of debt or finance, such as personal loans and credit cards, is that you have the option and ability to make large or emergency purchases if you don’t have sufficient savings.

We encourage you to read our blog on Personal Loans Vs Credit Cards to find out more about them.

So long as you have a clear repayment plan and have budgeted accordingly, by using debt and finance sensibly, these can help you pay for holidays, a new car, or other luxuries without the need for savings. Though, keep in mind that paying for these things from your savings is usually cheaper because you will almost always be required to pay interest on the debt.

Using Debt Sensibly

It is crucial if you’re going to use debt for certain things that you primarily use it for large purchases or in emergencies, and always have a plan for making repayments on time. If you suddenly find yourself using debt to cover everyday living expenses, then you may be at risk of entering a bad debt cycle, where you use your disposable income to clear debts but use credit for your everyday expenses.

Although debt can be beneficial under certain circumstances, it is up to you to ensure that it does not become a stressful burden that can have a profound effect on your life.

We encourage you to read our blog on How to Pay Off Credit Card Debts.

Knowing When You Have Too Much Debt

Even if you have carried out detailed personal budgeting and calculated your personal debt capacity, you might still find yourself struggling with debts. If this is true of your situation, you should take action immediately. Speak to your creditors about your situation or seek help from a financial counsellor if you think you are in financial difficulty. If you are struggling with debts but have not started missing payments, depending on your credit score and other circumstances you might benefit from . But debt consolidation or refinancing loans do not work for everyone. For some they are merely short-term fixes especially if you cannot meet the repayments for the new loan. You need to consider whether a debt consolidation loan works for you in your financial circumstances or speak to a financial counsellor if you need help in sorting out your money.



Disclaimer:  This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action, you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.



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