Almost every American adult has credit card debt. According to data from the Federal Reserve Bank of New York, the average American household owes $7,951 to credit card companies.1
Having credit card debt is not an issue, but carrying too much can lead to financial hardship and dips in your credit score. But how much credit card debt is too much? In this article, we’ll shed some light on credit card companies and how debt affects your credit utilization ratio.
Types of Credit Card Debt
There are various types of credit card debt that a borrower can have. This helpful chart briefly details the different credit card debt categories:
| Type of Credit Card Debt | Description |
| Purchase Balances | Debt accumulated from everyday purchases made using the credit card. |
| Cash Advances | Money borrowed against the credit card’s line of credit, often with high fees and interest rates. |
| Balance Transfers | Debt moved from one credit card to another, typically to take advantage of lower interest rates. |
| Retail Credit Card Debt | Debt accumulated on store-specific credit cards, usually with higher interest rates than general credit cards. |
| Introductory Offer Debt | Debt accrued during a promotional period with lower interest rates that increases after the period ends. |
| Penalties and Fees | Additional charges incurred from late payments, over-limit fees, or other violations of credit card terms. |
How Much is Too Much Credit Card Debt?
Too much credit card debt can negatively affect your credit score in many ways. There are two financial benchmarks that credit analysts look at to determine approval for financial products: debt-to-income ratio and credit utilization ratio. It’s important to note that keeping up with at least the minimum payment each month can also impact these ratios positively.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is a percentage that reflects how much of your gross monthly income goes toward debt. If credit analysts determine that too much of your income goes toward debt, you may not qualify for new loans or credit cards. Making at least the minimum payment on your credit cards can help manage this ratio more effectively.
Credit Utilization Rate
A credit utilization rate is a percentage that represents the amount of credit you are currently using. A high credit utilization ratio can look bad to credit analysts because it means that a borrower may not be financially responsible. Ensuring you make at least the minimum payment can help keep your credit utilization rate in check, thus maintaining a healthier credit score.
Signs You Have Too Much Credit Card Debt
There are warning signs that indicate you may have too much credit card debt. If you notice any of these signs, it’s critical to prioritize debt repayment.
- Maxed-Out Cards – Reaching your credit limits is a clear sign that you have too much debt. Maxed-out credit limits will make it harder to manage your financial stress.
- Minimum Payments – If you can’t afford to pay more than the minimum payment on credit cards, then you may have too much debt. Remember that only making minimum payments every month can greatly increase your existing balance.
- High Interest Fees – When your monthly interest fee is excessive, then your credit card balance is too high. Lowering your balance can help you avoid paying too much interest.
- Payment Skipping – If you’re skipping credit card payments because you can’t afford even the minimum payments, then you have too much debt to your name.
Impacts of Excessive Credit Card Debt
Many psychologists warn that prolonged financial hardship can cause a variety of physical and psychological issues, so it’s important to tackle the root of the problem. High credit card balances can also result in delinquent behavior, such as missed payments. Credit bureaus add missed payments to your credit report, which will further lower your credit score.
Calculating Your Debt Load
Knowing how to calculate your credit card debt can help you stay on top of your finances and prevent a heavy debt load. The formula for calculating your debt ratio is simple:
- Debt-to-Income Ratio = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Here’s a step-by-step guide on how this formula works:
- Add up your total monthly debt payments.
- Determine your gross monthly income (gross annual income ÷ 12).
- Divide your total monthly debt payments by your gross monthly income.
- Get your debt ratio!
Using this formula provides you with a clear financial assessment of your personal finances. You can also use free financial calculators online. These financial calculators are similar to ones used by credit reporting agencies.
Creating a Budget to Manage Debt
Budgeting your money can improve your financial habits and help you successfully manage debt. If you’re unsure how to make a yearly budget, consider using the 50/30/20 rule. This budget strategy can be used for monthly or yearly financial planning.
Here’s how you can get started:
- Calculate your total monthly income.
- Determine what 50% of your income is, and use that amount for necessary expenses (rent, groceries, etc.)
- Calculate 30% of your income and use it for unnecessary expenses (entertainment, eating out, clothes, etc.)
- Use the remaining 20% of your income for saving or debt repayment.
- Use a budgeting app or spreadsheet for expense tracking.
Strategies for Paying Down Debt
Paying down your debt can help you achieve financial freedom. Many people hire debt management firms to help them establish debt repayment plans, but these options typically cost money.
Instead, you can use one of the following debt repayment strategies:
Avalanche Method
The avalanche method focuses on saving money by prioritizing credit card debts with the highest interest rates. To get started, determine which debt has the highest interest rate. Pay as much as you can toward that debt and the minimum payment amount on all other credit card debts. Once that debt is paid off, you move onto the next highest rate and so forth.
Snowball Method
The snowball method focuses on quick debt repayment. Most financial educators recommend this strategy with their clients, as it provides faster results. Borrowers pay off their debt from smallest to largest. Pay as much as possible on your smallest debt and make minimum payments on all other debt. This strategy quickly reduces the number of monthly bills you have and keeps you motivated.
Debt Consolidation Options
Debt consolidation is the process of merging multiple debts into one account to reduce the number of monthly bills you have. Obtaining a debt consolidation loan with better terms could help you save money on interest fees and obtain a longer repayment plan.
There are various debt consolidation loans to choose from, such as the following:
Balance Transfers
Many people consolidate debt using a balance transfer credit card. Balance transfer cards do not have strict repayment plans, which means that borrowers can pay as little as the minimum every month. However, a balance transfer card has some downsides.
Balance transfer cards typically charge a balance transfer fee, which is typically a percentage of the total transferred amount. If you transfer a large debt amount, you could pay a substantial fee. In addition, you would have to establish a debt repayment plan on your own.
Personal Loans
Personal loans can be used as debt consolidation loans because they offer high loan amounts, decent rates, and long repayment periods. Personal loans also have strict repayment schedules, so you know your final payment date and exactly how many monthly payments you have to make.
Banks and private lenders offer personal loans, so borrowers can choose from a variety of options. If you use personal loans for debt consolidation, remember to inquire with multiple lenders and compare rates to find the best offer.
Consolidation Programs
There are many organizations that offer debt consolidation programs that help borrowers eliminate high credit card balances. Some debt consolidation programs cost money, while others offer free services. One nonprofit credit counseling agency to consider is the National Foundation for Credit Counseling (NFCC). The NFCC is the oldest and largest organization for financial counseling in the U.S.
Do You Have Too Much Credit Card Debt? Consider Your Options with CreditNinja
Having too much debt can result in physical and psychological issues that affect your life. But luckily, there are various ways to reduce your debt load and track your financial progress. Once you notice the warning signs of too much debt, you can create a budget, follow a debt repayment plan, or consolidate debt!
CreditNinja offers flexible, online personal loans for unexpected emergencies and quick debt relief. If you’re struggling with too much credit card debt, consider applying with us! Using personal loans as debt consolidation loans can provide you with competitive rates, flexible repayment plans, and customized loan terms. Apply online today and you could get funding the same day you’re approved.*
FAQS: How Much Credit Card Debt is Too Much Debt
Here are some answers to frequently asked questions about how much credit card debt is too much:
What Is Considered Excessive Credit Card Debt?
Excessive credit card debt is generally seen as having more debt than you can comfortably manage or pay off given your income and expenses. This varies by individual, but it’s often considered excessive if your debt exceeds 40% of your income or if you’re unable to pay down the balance each month.
Is $10,000 in Credit Card Debt Bad?
Whether $10,000 in credit card debt is bad depends on your financial situation. It could be manageable for some if it’s within their ability to repay without straining other financial obligations. For others, it might be challenging, especially if it leads to high interest payments and financial stress.
Is $5,000 in Credit Card Debt a Lot?
$5,000 in credit card debt can be a lot depending on your financial circumstances, such as your income, expenses, and overall financial goals. If it’s causing you stress or impacting your ability to save or invest, it might be worth looking into ways to reduce this debt.
How Much Credit Card Debt Is Normal?
The average credit card debt varies widely by age, income, and lifestyle, but many financial advisors suggest keeping your total credit card debt at a level that can be paid off within a few months if necessary. Keeping your credit utilization—how much of your credit limit you’re using—below 30% is also generally advised to maintain good credit health.
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