How much is too much credit card debt? According to CBS News, Americans owe almost a trillion dollars ($986 billion) in credit card debt.
About 35% of Americans carry credit card debt from month to month. There’s no doubt that credit cards can be convenient in financial emergencies, but how much is too much credit card debt?
How Much Credit Card Debt Is Too Much?
I will not stand here and pretend to be holier than thou when it comes to debt. Credit card debt is something I have struggled with in my life. It got so bad that I had to quickly educate myself on how to get out of debt, and I did! That, however, doesn’t mean that I didn’t make many mistakes while trying to dig myself out of the mountain of credit card debt I had.
But through that all, I learned how to stay and remain afloat. And it all starts with finding out how much credit card debt is too much for you! We’re all different, and my financial situation isn’t necessarily the same as yours.
What would qualify as too much credit card debt for me might just be a blip on the financial radar for you, but it could also send someone else into bankruptcy.
So, how much is too much credit card debt for you? When you find that:
- You are struggling or are unable to make the minimum credit card payment
- Most, if not all, of your monthly repayments go towards servicing the credit card debt interest
- Your credit card balance increases each month
- Your credit card debt is making it impossible for you to afford most of your basic needs
Simply put, if your credit card is no longer a convenience but a burden around your financial neck, then you might have too much credit card debt.
Signs That You Have Too Much Debt
Now, let’s get technical for a bit. I know, I know—no one likes homework. But this is important; it’s how credit companies and credit rating bureaus determine how much of a risk you are, and that determines how much credit you can access and at what interest rate.
You see, it is important!
You can use three main ratios to determine whether you carry too much credit card debt. These are the credit utilization ratio, debt-to-income ratio, and credit card debt ratio.
Let’s look at them one by one.
Credit Utilization Ratio
The credit utilization ratio is calculated by dividing your current total credit card balance by your total credit limit.
Credit utilization = your current total balance / your total credit limit
Apart from your credit history, your credit utilization ratio is the most important factor in determining your credit score.
For example, if you have three credit cards, each with a credit limit of $1,000, your total credit limit is $3,000. Now, let’s say you use about $150 on each credit card throughout the month and carry the same credit card balance. Your credit utilization ratio will be $450/$3,000 = 0.15, which is 15%.
Ideally, your credit utilization ratio should not exceed 30%; otherwise, it will begin to negatively affect your credit score.
Also known as DTI, the debt-to-income ratio is what lenders use to determine whether or not they should give you more money. Lenders typically don’t extend credit to people already holding too much of it. It makes you risky.
Debt-to-income is typically calculated by dividing your total monthly debt payments by your total gross (before taxes) monthly income.
Debt-to-income = your total monthly debt payments / your total gross monthly income
In this case, your gross monthly income is what you make before taxes, while your total monthly debt payments are any debt that will take you more than six months to repay.
These often include things like:
- Property tax
- Student loan
- Auto loan
- Credit card debt
As well as most other personal loans.
When it comes to DTI, anything above 43% is considered too risky.
Credit Card Debt Ratio
Of the three ways to determine whether or not you are carrying too much credit card debt, this is the simplest and most effective for you (the rest lean more towards what credit card companies or lenders use to determine your creditworthiness).
Your credit card debt ratio is calculated by dividing your total monthly credit card payments by your total net monthly income.
Credit card debt ratio = your total monthly credit card payments / your total net monthly income
Your net income is what you have left after taxes and other mandatory deductions. It’s essentially the money you have left to spend, which you use to pay the monthly payment on your credit card bill.
The idea is to keep this ratio under 10% at all times! In short, if your net income comes to around $1,000 every month, the highest credit card debt you should carry for that month should not exceed $100, which is 10% of $1,000.
How to Get Out of Credit Card Debt
Carrying too much credit card debt has consequences:
- Your credit score will take a hit, which means you’ll have a harder time getting good, affordable credit in the future
- You’ll accrue a lot of interest, which only goes toward pushing you deeper into debt
- You won’t be able to afford what you like and need, affecting your mental health
It’s paramount you find ways to get out of debt if you find that you are carrying too much of it.
Here are some tips that can help:
- Get the full picture: List all your income sources (monthly), all your expenses, and all your debts. This will give you a clear picture of your financial situation.
- Consolidate your debt: Try as much as you can to put all your debt on one credit card—the one with the lowest interest rate—and then get rid of the rest.
- Create a budget: By now, you all know I’m crazy about creating a budget. I have found it one of the best ways to manage your finances.
- Get professional help: If all this is overwhelming, you might consider getting professional help from a financial advisor or an accountant who can offer credit counseling. While it might seem like just a way to add more debt to your list, in the long run, the money you pay for credit counseling might help you get out of debt and live a more financially sound lifestyle.
Check out my Financial Reboot Course if you want to reorganize your finances as soon as possible!