Credit card debt and other forms of consumer debt have become so commonplace in the last couple of decades that it can be difficult to determine exactly how much debt is too much.
When everyone has it, how can you know when it is out of control? For example, According to Experian research, the average credit card balance among consumers was $5,910 as of Q3 2022.1 And the average American has four credit cards.2
There is no major issue with having a couple of credit cards with a small balance on each, but how can you tell when you’ve crossed the invisible line of too much debt?
It is crucial to keep your eyes open for possible warning signs that your credit card debt has become problematic so that you can put a halt to your spending. The quicker you are able to catch on to when your credit card debt has become too much debt, the easier it will be to reverse any damage and minimize your debt.
Types of Common Debt
Although this article will focus on credit cards it may be helpful to get an overview of common types of debts out there, here are a few:
- Student Loan Debt — These are loans taken out to cover the cost of higher education. They can be issued by the federal government or private lenders and often have favorable interest rates and repayment terms.
- Auto Loan Debt — This type of debt is used to purchase a vehicle and is secured by the vehicle itself. If the borrower fails to make payments, the lender can repossess the car.
- Personal Loan Debt — A personal loan can be used for various purposes, such as consolidating debt or making a large purchase. They can be secured or unsecured.
- Medical Debt — Medical debt accrued due to medical expenses that are not covered by insurance. It can be a significant burden for many families.
- Payday Loan Debt — Payday loans are short-term, high-interest loans designed to be paid back with the borrower’s next paycheck. They can lead to a cycle of debt if not managed carefully.
The Dangers of Credit Card Debt
Credit card debt can get out of hand surprisingly fast. Credit cards are a product that uses revolving credit to lend consumers money to make purchases. There are a few reasons why they can be dangerous:
- Easy to Spend — The problem with credit cards is that they can become incredibly easy to rely on for regular everyday spending as well as any unexpected expense that pops up.
- High Interest — Credit cards are high-interest debt which can make them incredibly difficult to pay off. The higher the interest rate on your debt, the quicker the balance will rise. This is especially an issue with credit cards and other loan options like payday loans.
Payday loans have such short loan terms that it can feel near impossible to pay off the balance plus the interest charges on the due date. With credit cards, an interest rate high enough can put you in a situation where your minimum payments have no impact on the card’s principal balance.
- Can Lead to a Cycle Debt — Problem debt has the potential to trap you in an endless cycle of debt that brings down your credit score, so it becomes impossible to qualify for more affordable lending products. It is for this reason that it is so important to know how much debt is too much debt so you can begin reducing it immediately.
Warning Signs That You Have Too Much Debt
If you aren’t sure what you need to watch out for, it can be significantly more difficult to determine whether you have too much debt. It is not enough to simply compare your debt or money struggles to others, as so many people have too much credit card debt and are not even aware of it.
A better strategy is to focus on yourself and notice red flags or warning signs that might indicate you are approaching problematic levels of debt.
Here are several signs to keep an eye out for that indicate your debt is too much:
| Indicator | Description | Implication |
| Credit Utilization Ratio | The percentage of your available credit that you’re using. | A high ratio (often over 30%) may indicate overextension. |
| Debt-to-Income Ratio | The percentage of your monthly gross income that goes towards debts. | A high ratio (often over 43%) may indicate a struggle with debt. |
| Living Paycheck to Paycheck | If you’re consistently running out of money before your next paycheck. | You are relying on debt to cover basic living expenses. |
| You Are Unable to Save | If you find it difficult or impossible to save money. | Too much of your income is going towards debt, leaving little for savings. |
| Payments Don’t Bring Balances Down | Minimum amounts on your debts don’t reduce the principal. | Your debt is growing faster than you can pay it off. |
Keep reading for more details on these important indicators:
Credit Utilization Ratio
Your credit utilization ratio being too high is one of the surest signs that your debt is too much. The credit utilization ratio is how much total credit card debt you have compared to your overall credit limit on all your accounts.
Most financial experts recommend a credit utilization ratio of 30% or below to keep your credit card debt in check. If you are spending nearly up to your credit limit on your credit cards, then your credit utilization is likely far higher than it should be.
Debt-to-Income Ratio
A good debt-to-income ratio is necessary to avoid problem debt. Your debt-to-income ratio compares your total debt to your gross monthly income. If your gross monthly income is too low in comparison with your total debt, you have a debt-to-income ratio that may be warning you that you have way too much debt.
It might be necessary to do what you can to close the gap in your debt-to-income ratio by paying off your debt and increasing your income to prevent your debt payments from taking up a considerable portion of your gross income each month.
Living Paycheck to Paycheck
A sure sign that your debt has taken over is when your card payments are so high that you are living paycheck to paycheck. When your monthly payments on your other debt are making it difficult to even afford your monthly mortgage payment, you need to minimize your bad debt as soon as possible.
A low debt-to-income ratio paired with high monthly debt obligations can make all other monthly expenses more challenging to budget.
You Are Unable To Save
If you consistently come to the end of the month with no money leftover after your monthly expenses including your debt payments, you likely are unable to do much saving. This should also be a red flag.
Minimum Payments Don’t Bring Balances Down
The final sign of too much credit card debt might be the most frustrating of all. If you have credit card balances with a particularly high-interest rate, you might experience a phenomenon common for those with too much credit card debt, wherein your monthly payments only pay off the interest charges and not the actual balance.
When you can only afford to pay credit card companies the minimum due, you may not actually be making any dent in your debt balance because the interest being accrued is higher than the monthly payment. This would drive anyone crazy as it feels like you are battling your debt, and the debt is winning. If this sounds familiar to you, it is time to pay off your debt and stop taking on new debt altogether.
How To Minimize Your Credit Card Debt
If you have come to the conclusion that you have too much debt, the best thing you can do for your financial health is to minimize it as much as possible. Tackling credit card debt can be an overwhelming task to confront especially if you are not sure how to get started.
Here are a couple of tips to help you get on the right track to financial freedom:
Re-Evaluate Your Monthly Budget
The first thing that we recommend doing to begin minimizing your debt is to take some time to look over your monthly budget. Analyze how much of your monthly income is put towards necessities like groceries and monthly mortgage payments. Things like rent or mortgage debt are necessary expenses that can’t be eliminated from your budget.
But once you set these aside, there should be plenty of unnecessary expenses left in your monthly budget that you may be able to minimize or get rid of all together. See what you can cut down on and redirect that cash to your monthly debt obligations.
Employ A Debt Relief Program
If you are unsure how to approach your credit card debt or have trouble getting motivated, it might be a good idea to implement a debt repayment strategy or a debt relief program to help yourself stay on track. Some popular debt repayment plans include the snowball method and the avalanche method. But there are others, here are some options:
Debt Snowball Method
With the debt snowball method, you start paying off your smallest balance first while paying only the minimum due on the rest of your credit cards. This strategy keeps your motivation up by giving you wins, and each monthly payment adds onto the last as each balance is repaid in full.
Debt Avalanche Method
The debt avalanche method focuses less on motivation and more on saving money on interest. In the avalanche method, you pay off the balances with the highest interest rates first while making the minimum payments on your other monthly debt payments. After the first balance has been taken care of, you carry over the monthly payment to the balance with the next highest interest rate.
Consider a Debt Consolidation Loan
Something that might help you manage your total monthly debt are debt consolidation loans. If you have too many credit card payments to keep track of, a common solution is to use personal loans to pay off your debt, so you have one straightforward monthly payment while working on decreasing your debt load.
With personal loans or debt consolidations, you might be able to access more competitive interest rates that could help you save money. It may be significantly easier to keep all of your debt in one place with personal loans, so you don’t need to worry about missing a payment.
Seek Help With a Credit Counseling Agency
Credit counseling is a valuable resource for anyone looking to take control of their financial life, whether that means getting out of debt or simply learning how to manage money more effectively. If you think credit counseling might be right for you, take the time to find a reputable agency and start the conversation.
Helpful FAQS About Credit Cards
Because credit cards are the most common type of debt, below is an FAQ on these types of debt, however, some of these may apply to auto loans/car loans, medical bills, mortgage debt, fixed rate loans, installment loans, cash advance loans, etc.
Absolutely! If you’re having trouble, don’t be shy about reaching out to your credit card company. They often have hardship programs or can work out a payment plan with you. It’s in their best interest to help you pay what you owe, so they’re usually willing to work with you. Just be honest and proactive about your situation. Debt settlement is another thing you can potentially pursue with your creditors.
A grace period is like a little financial breathing room! It’s the time between when your statement closes and when your payment is due. If you pay your balance in full during this time, you won’t be charged interest. It’s a great way to use your credit card without paying extra. Just be sure to pay in full by the due date, or the interest will start adding up.
Good debt is often seen as an investment in your future. It is typically used to finance something that will increase in value or generate long-term income. Think of it as a tool that can help you achieve a bigger goal. Some examples include mortgages and student loans.
Bad debt on the other hand drains your resources and does not provide you with lasting value. Bad debt is often used to purchase things that quickly lose value and don’t generate long-term income or growth. Some examples of bad debt include credit cards and payday loans.
CreditNinja’s Thoughts On Debt
At CreditNinja, we always encourage people to learn everything they can about a credit product before they decide to take one out, this way they can make an informed decision.
Check out CreditNinja’s glossary terms where we give you a digestible overview of important financial terms, including key loan aspects. We are also passionate about providing free online resources that can help you figure out a strategy for debt repayment—our several blogs can help with that.
