University of Idaho Extension

Reducing Debt

Debt free graphic

How Much Debt Is Too Much?

Before you agree to take on more debt, make sure your income covers your bills.

We have all asked ourselves "Can I really afford this?" before making a major purchase. How we answer that question can have far-reaching impacts. An unaffordable cash purchase can wreck a budget for months; an unwise new loan or credit card purchase can have devastating effects for years.

Before you agree to take on more debt, make sure your income covers your bills. Here are some commonly recommended guidelines:

  • Keep your monthly payments for debts—other than your mortgage—below 15% of your after-tax take-home pay. This includes your credit cards, student loans, child support, alimony, vehicle loans, and so on.
  • Before taking on new debt, determine your debt-to-income ratio with and without the new expense. For more information and forms to calculate your ratio visit eXtension’s “How Much Consumer Debt is Too Much?” or "Calculate Your Debt-to-Income Ratio" from Colorado State University.
  • Don't become "house-poor" and jeopardize your ability to deal with financial crises. Your total monthly cost for housing (mortgage, taxes, utilities, maintenance, and insurance) shouldn't exceed one-third of your monthly take-home pay.
  • Mortgage lenders typically use two ratios to more precisely determine how much you can afford to pay for your mortgage:
    • Front-end ratio: Your monthly payment should generally be less than 28% of your monthly gross (before-tax) income. For a conventional loan, this "front-end ratio" can be as high as 33%. If your monthly gross income is $4,000, you can qualify for a 28% front-end loan if your principal, interest, taxes, and insurance (PITI) total no more than $1,120 ($4,000 x .28 = $1,120). With that same monthly income, you can qualify for a conventional loan if your PITI totals no more than $1,320 ($4,000 x .33 = $1,320). Regardless of the type of loan you select, your other debts plus your monthly mortgage payment should not exceed 36% of your gross income.
    • Back-end ratio: This ratio includes your other debts in calculating whether you can afford to make a certain mortgage payment. Mortgage lenders examine whether your total debt (mortgage plus other recurring debt) exceeds a figure between 33% and 45% of your monthly income. For example, if you make $4,000 a month and are applying for a mortgage with a PITI of $1,120, a 40% back-end ratio would allow your other debts to total only $480 ($4,000 x .40 = $1,600 - $1,120 = $480).

Too often, lenders are willing to loan you more money than you can comfortably afford to pay back. Be sure to calculate your debt-to-income ratio before taking on new debt.

Stop Using Credit

If you have accumulated too much debt, it's time to take control. The first step is to stop using credit. Don't take on new debts or charge any new items.Money tic tac toe Paying off debt is hard enough; don't add to what you owe! Pay for items that you absolutely need with cash, debit card, checks, or electronic withdrawals from your checking account. Leave your credit cards at home.

One way to stop using credit cards is to place them in a container of water. Freeze the container so the water forms ice. Because your credit cards will be locked within this ice block, you won't be able to use them for impulse purchases. (Note: Microwaving the block will destroy the magnetic strip on the cards, making them unusable.)

Assess the Problem

Many debt problems have their beginnings in job losses, health crises, divorce, and excessive mortgage payments. Being in the habit of buying things you can't afford and neglecting to build an emergency fund contribute as well. But even responsible credit users can get overextended. Once you've analyzed the roots of your debt problem, it's time to assess its extent.

Start by making a list of everyone you owe and how much you owe them. Our Getting Out of Debt Worksheet will make this easier. Include:

  • Name of creditor (a company or person to whom you owe money), their address, and their phone number
  • Your account number
  • Annual percentage rate (APR) of the loan or credit card
  • Minimum monthly payment
  • Number of months or payments remaining on the loan
  • Total balance owed (amount of debt remaining)
  • Payment due date
  • Amount last paid
  • Date last paid
  • Total amount already paid
  • Whether the debt is secured by a home, vehicle, land, or other property. In other words, can a creditor seize that property (also called "collateral") if you stop making payments on the debt?

After you've listed your debts, define your debt-reduction goals. Then, select a time frame and divide each challenge into specific, manageable, and measurable steps. For example, you might decide, "I will stop making purchases that are not necessary, reduce my spending by $10 a day, and use that money to pay down my credit card debt." If you owe $8,000 on your credit card at 18% interest and you reduce your spending (or increase your income) by $10 a day, you'll be able to repay your debt in three years. If your debt is greater than $8,000 or your interest rate is higher than 18%, you must increase the amount per day that you put toward the debt, or it will take longer to repay.


To decrease your expenses and have more money to repay your debts, start by tracking your spending on a calendar, in a notebook, or on our Monthly Income & Expenses Worksheet. This exercise will give you a realistic idea of your fixed and variable expenses:

  • Your fixed expenses are those that don't vary much from month to month, such as your mortgage/rent, vehicle payment, savings, insurance, and other loans.
  • Your variable expenses include food, utilities, clothing, vehicle fuel/maintenance, education, household, telephone, recreation, and personal, medical, child, and elder care.Finding the money

It's usually easier to reduce the amount you pay for variable expenses than fixed expenses. If you can't find money for repaying your debts by reducing your variable expenses, you'll probably need to reduce your fixed expenses by shaving your spending down to the bare-bones level. You may need to sell a vehicle, move to less expensive housing, and/or get a second job so that your income will cover both your current expenses and your debt repayment.

Here are a few ideas for finding money to repay debt:

  • Change your income tax withholding. If you typically get money back from the Internal Revenue Service when you pay your income taxes, change your deductions. If you have a low income and children, are you applying for Earned Income Tax Credits?
  • Contact your creditor and request that your interest rates be lowered. Your request will more likely be granted if you pay your bills on time.
  • Investigate home equity loans or lines of credit. Consider this suggestion with caution. Your home is a secured debt. If you don't repay a home equity loan, your home could be repossessed. It's fine to refinance consumer debt with a home equity loan only if you pay it off fast and resist new debt.

See Spend Less, Live Well for more cost-cutting ideas.


There are several ways to get out of debt. Each of the four possible methods described below has advantages. Select the one(s) making the most sense for your situation.

Importance Method

Pay the debts that will keep your family safe and your credit rating intact—for example, your rent/mortgage, food, and utilities. If you're making payments on secured debts like a house, vehicles, furniture, or appliances, don't risk losing that property by getting behind. Until you can pay more, just make the minimum payments on your other debts and credit cards. That will keep you in good standing with all of your creditors and won't damage your credit rating.

Highest Interest Rate Method

Pay off the debt with the highest interest rate first. Pay as much as you can on that debt each month until it's paid off. Meanwhile, make minimum payments on your other debts. Then apply the payments you're making on the highest-rate debt to the next highest-rate debt, and so on.

Debt Snowball Method

Pay off the bills with the lowest balances first. For example, if you have only four payments left on your car or washing machine loans, pay those bills first. Then use the money you were putting on those payments to pay off the debt with the next-lowest balance. This method allows you to see more quickly the progress you're making in reducing your debt.

Note: Utah State University Extension has developed PowerPay, a computer program that you can access online at PowerPay is a system designed to help you eliminate debt in the fastest possible way. It works when you're willing to:

  • Make a commitment to stop borrowing or buying with credit
  • Systematically pay off debts
  • Eliminate each debt and continue to apply that debt payment to the next debt obligation

Debt Consolidation Method

You may be able to get a single loan that pays off your other debts. The monthly payment on this "consolidation" loan will usually be lower than the total payments you're now making on your other debts, because consolidation loans are spread out over a longer period of time. However, debt consolidation may cost you more in the long run because you'll likely pay more interest.

Talk to Your Lenders

Contact your creditors as soon as you recognize you're overextended. Before talking with them, review your lists of debts, income, and expenses and decide how much you can pay on each bill.

Explain your situation and try to work out a modified payment plan. Most creditors will work with you if they believe you're acting in good faith and the situation is temporary. Some may reduce your payments to a more manageable level. Make these lower payments on time.

Don't put off negotiating with your creditors until your accounts have been turned over to a debt-collection agency. At that point, creditors will be less likely to work with you.


If you're unable to develop your own debt-repayment plan, you can get counseling in debt management from family support centers (for Armed Services personnel), some credit unions and churches, and credit counseling agencies.

Before selecting a credit counseling agency, read "How can you tell if a certain credit counseling agency is reputable and nonprofit?"

Credit counseling agencies can be private, non-profit, or public and can counsel you in person, on the Internet, or by telephone. If possible, choose a non-profit agency that offers in-person counseling. The agency should provide educational programs, money management advice, and assistance with budget development. The first counseling session should last about an hour, and the counselor should discuss your entire financial situation, help you develop a personalized plan to solve money problems, and supply follow-up counseling.Making a budget

A credit counseling agency can negotiate with your creditors to repay debts with a debt-repayment plan. Under the plan, creditors often agree to reduce payments, lower or entirely drop interest and finance charges, and forgive late and over-the-limit fees. After starting the plan, you'll deposit money with the credit counseling agency each month. The agency will pay your bills according to a schedule it developed with you and your creditors. You'll pay a small fee for this service.

You may be required to stop applying for and using credit while you participate in the debt-repayment plan. A typical plan takes 24 to 48 months to complete. Ask your counselor to estimate how long yours will take.

When all else fails, bankruptcy may be your only option. Because it stays on your credit record for up to 10 years, bankruptcy is a last resort.

Avoid Future Debt

It's important to understand your income and expenses before committing future earnings to debt payment. Plan for major purchases and observe the commonly recommended guidelines in How Much Debt Is Too Much?

Because it's not enough to simply cover today's costs, you'll also need emergency savings to tide yourself over in case of illness or job loss. Most experts suggest setting aside enough money to last three to six months. Every month, place money from your paycheck into an emergency savings fund until you have at least three months' worth of living expenses.

If your income does not provide enough funds to cover savings, consider reducing your expenses and, if necessary, generate extra income or find money for savings after you pay off your current debt.

Developed by:

Marilyn Bischoff
University of Idaho Extension Professor and Family Economics Specialist
322 E. Front St., Ste. 180
Boise, ID 83702
(208) 364-9910

Marsha Lockard
University of Idaho Extension Educator-Owyhee County
P.O Box 400 (238 8th Avenue West)
Marsing, ID 83639
(208) 896-4104

2014 Update by:

Nancy M. Porter, Ph.D.
Extension Personal and Family Finance Consultant                                      University of Idaho
(864) 650-8289

Other credits:

Educational Communications,
University of Idaho College of Agricultural and Life Sciences:
Editing: Marlene Fritz, Communications Specialist, Boise
Web Design: Jacob Peterson, Web Designer, Moscow

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