If you feel overwhelmed by credit card debt, you’re not alone. The average American carries a credit card balance of $5,805, and this number has increased in recent years. As the statistics indicate, having some debt is normal. But this raises a question:
How much credit card debt is too much?
Between interest, fees and other charges, credit card debt is expensive. In addition, large balances can impact your credit score. To avoid excessive debt, it’s important to know how much is too much — and whether you’re over the limit. Here’s how to determine if your credit card debt is too high.
How much is too much credit card debt?
In general, credit card debt that exceeds 30% of your credit limit is considered too much. Debt at that level could negatively impact your FICO score. Beyond that, some personal finance experts argue that carrying a credit card balance — of any size — between statements is an indication of too much debt. It means that you’re spending more than you make, and you also incur interest charges on the unpaid balance.
Different people have different levels of comfort with debt. This can be due to a number of factors related to their unique financial circumstances. In all cases, debt that feels unmanageable is a good indication that it’s too much.
What are the signs of too much debt?
You have a high credit utilization ratio. Your credit utilization ratio indicates how much credit you’re using in relation to your available credit. Credit bureaus pay attention to this ratio when determining your credit score. Most experts recommend keeping your credit utilization rate for revolving debt (such as credit card debt) under 30%.
Calculating your credit utilization is simple. Add up your credit card balances, add up all your credit limits, then divide the two.
Current total balance / total credit limit = credit utilization
The lower the ratio, the better. If your credit utilization ratio is more than 30%, you may be in too much debt.
You have a high debt-to-income ratio (DTI). Your debt-to-income ratio indicates how your monthly debt payments compare to your monthly income. Lenders look at DTI to determine if they should approve you for a loan.
To calculate your DTI, divide your total monthly debt payments by your total gross monthly income. Your gross monthly income is your income before your employer takes out taxes, benefits, Social Security and any other deductions. You can find your gross monthly income on your pay stub.
Total monthly debt payments / total gross monthly income = debt-to-income
Lenders typically look for a DTI between 30% and 40%. A higher DTI shows that you are managing a large amount of debt already, which may deter some lenders and prevent you from receiving new credit.
If your DTI primarily consists of credit card debt, that’s a key indicator of too much credit card debt.
You’re unable to keep your debt from growing. While paying off your balance in full each month is ideal, it may not be practical for everyone. If you must carry a balance, one sign that you have too much debt is if you’re unable to keep your debt from growing. At the very least, paying off new charges is one way to help keep your debt in check until you’re able to reduce it.
You’re only making minimum payments. If you can only afford to make the minimum payment on each credit card bill, that’s an indicator that your credit card debt is more than you can handle. Minimum payments only alleviate a tiny portion of your debt, and are not a sustainable method of repayment.
You’re maxing out credit cards. If you’re regularly reaching your credit limit, you’re almost certainly in too much credit card debt. You’ll also be exceeding the recommended credit utilization rate.
You’re forced to carry credit card balances. A fundamental rule of personal finance is to spend less than you earn. Carrying balances on your credit card because you’re unable to pay it off is a sign that you’re spending more than you make. This should be avoided, even if the balance is small and the interest you pay is little.
Your card payments are higher than other bills. If your credit card payments are close to or higher than your other monthly payments, such as auto loans or student loans, your credit card debt may be excessive.
How does credit card debt affect your credit score?
A credit utilization ratio over 30% can impact your credit score. It’s the second-most important factor of your FICO credit score, right behind payment history.
Going into collections is another way credit card debt can significantly impact your credit score. This can happen when borrowers go months without making their minimum payments. Credit card issuers then sell debt to a collections agency, and borrowers receive calls from debt collectors regarding payment.
How do I reduce debt?
Make a plan for debt repayment. Start by listing your total debt for each credit card, along with each card’s interest rate and monthly payments. This will give you a visual representation of your debt. Then, pick a debt repayment strategy, such as the debt avalanche or snowball methods.
Apply for a balance transfer. Like its name suggests, a balance transfer credit card lets you move a balance to another credit card. This puts all your credit card debt in one place, making it easier to repay. New customers usually receive a 0% promotional APR, too. There are limitations to balance transfers, however.
You can only transfer funds within the credit limit of the new card. There are balance transfer fees per transfer, usually 3% to 5% of your balance, which adds on to the debt. And be sure to check what the regular APR is after the promotional one expires.
To determine the best balance transfer card for your financial situation, check to see if you can repay your debt within the 0% APR promotion period. To do this, divide your balance by the number of months included in the promotion. If those monthly payments seem doable, that card may be a good option.
Apply for a personal loan. Another option is to combine your debt with a debt consolidation loan and repay over time. Personal loans can have lower interest rates than credit cards. Applicants with a low credit score can get a friend or family member with good credit to co-sign the loan.
Seek help. If you need assistance with debt management, there are nonprofit credit counseling agencies that can help, sometimes at no cost. A personal finance specialist may recommend a debt management plan (DMP) to help you pay off your debt in a timely manner.
If you’re stuck in negative spending habits or struggle with paying on time, consulting a financial counselor is another option for professional help. Financial counselors can help you find strategies to pay off debt, rebuild your credit or even find immediate assistance for bills.
What experts say
“Your credit score is impacted by the balances you carry, with 30% of your score based on this factor. Keeping your balance low is essential to maintain a good score. As a rule of thumb, aim to keep your balances at or below 10% of your credit limit to have healthy credit.”
Jeanne Kelly, Credit Coach
The Kelly Group Coaching, Inc.
“Generally speaking, a normal amount of credit card debt is one that is manageable and can be paid off within a reasonable amount of time. As a general rule, credit card debt that is more than 30% of one’s total available credit could be considered too much. Additionally, if the total amount of credit card debt is more than one’s total income for the month, that could also be considered too much.”
Samantha Hawrylack, Co-Founder
“I would say that there is no one-size-fits-all answer to the question of what is a normal amount of credit card debt. The amount of credit card debt that is considered “normal” can vary depending on a variety of factors, such as a person’s income, expenses, and financial goals.
That being said, as a general rule of thumb, it is recommended that individuals aim to keep their credit card debt below 30% of their total available credit limit. This means that if you have a credit card with a $10,000 limit, you should try to keep your balance below $3,000.
If your credit card debt exceeds this threshold, it may be a sign that you are living beyond your means or that you are not managing your finances effectively. Additionally, carrying a high level of credit card debt can negatively impact your credit score, making it more difficult to obtain loans or credit in the future.”
Jon Morgan, CEO
Jeanne Kelly, Credit Coach
As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge & The Credit Makeover, Jeanne Kelly is a nationally recognized authority on credit consulting and credit scores. She has appeared on The Today Show, The Breakfast Club, Huffington Post, Credit.com, MyFico.com, ESME.com and more.
Samantha uses her BS in Finance and MBA to help others get control of their finances through managing, making, investing, and saving money. Due to following the FIRE Movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles. She is now a full-time entrepreneur and blogger.
Jon Morgan is the CEO and Editor-in-Chief of Venture Smarter, a leading consulting firm that specializes in helping startups and small businesses scale and grow. With over 9 years of experience in the industry, John has a wealth of knowledge and expertise in areas such as strategic planning, market research, and financial analysis. Born and bred in Georgia, he has worked with a wide range of clients, from early-stage startups to large corporations, and has a proven track record of helping them achieve their goals. In addition to his consulting work, Jon is also a sought-after speaker and author, sharing his insights on business growth and success with audiences around the world.