Credit Card Debt: How Much is Too Much?
10 MIN READ
Published June 27, 2023 | Updated January 24, 2024
Americans turn to their credit cards to meet a wide variety of expenses. With the annual inflation rate at 6.5% in 2022, most purchases have become more expensive.
The average credit card debt in the U.S. is $5,910, rising by 13% from the previous year in 2022. If you find yourself in a similar position, you may be wondering, “How much credit card debt is too much?”
If you think that you have too much credit card debt, paying attention to a few key indicators can help you determine where you stand. Actions like maxing out your cards and a high credit utilization ratio may indicate you have too much debt.
Maintaining good credit habits can help you avoid getting into too much debt. Start by taking stock of your debt and consider how you’ll pay it off in a cost-effective way, such as with a balance transfer credit card, a debt consolidation loan at a lower interest rate, or by enrolling in a debt settlement program.
Factors to Consider When Determining How Much Credit Card Debt Is Too Much
Several factors play a role in helping you determine how much credit card debt is too much for your situation. A clear sign is having high balances on multiple credit cards. Consider other factors such as your income, the limits of your credit cards, and if you have missed credit card payments recently. Read below to learn more about these factors:
The debt-to-income ratio (DTI) is the debt you owe in comparison to your income. This number does not appear on credit reports and does not directly impact your credit score. Instead, it plays a crucial role when you apply for credit. A high DTI usually indicates that you may have too much debt and that you could have trouble repaying.
Calculating your DTI ratio is easy. Let’s say you have a monthly income of $2,000, and your total amount of debt payments each month is $1,200. Divide $1,200 by $2,000 and then multiply that by 100. In this example, your DTI ratio is 60%. Ideally, your DTI ratio should be lower than 36%.
Credit utilization ratio refers to the amount of money you owe compared to the total credit available to you. Carrying high credit card balances or maxing out cards is a sign of having too much debt. This indicates that you might have a high credit utilization ratio.
Teresa Dodson, CEO and Founder of Greenbacks Consulting LLC. cautions individuals not to utilize too much credit. “Keeping your utilization rate low is a big factor in a good credit score."
For example, if you have a combined credit limit of $20,000 on all your credit cards and you owe $16,000, your credit utilization ratio will be 80%. Ideally, this number should be 30% or even lower for your best financial health.
"Extending yourself too much on credit can cause too much stress. Stay under 30% utilization and live within your means,” Dodson shares.
Other Financial Obligations
When determining how much credit card debt is too much for yourself or your family, it's also important to consider your other financial obligations. If you want to see how your debt fits into the larger picture, you should calculate how much cash you have left over each month. Subtract your debt payments and all expenses, such as mortgage payments, student loans, auto loans, groceries, insurance, and utilities, from your net monthly income. Ideally, you should have at least a couple hundred dollars remaining each month to save for your goals or an emergency fund.
How Much Credit Card Debt Is Too Much for My Income?
Regardless of your current income, you may be wondering, “How much credit card debt is too much for my income?” Looking at your monthly income can help you get personalized insight into your debt situation. Ideally, you don’t want your minimum credit card payments to be over 10% of your net income after deductions and taxes.
If credit card payments are taking up a large portion of your income, it may be challenging to afford all the other necessities you need. Using the 10% rule listed above, if you are earning a net income of $1,000 to $2,000 each month, the highest balance you should carry on your credit card should be $100 to $200.
Using the same ratio, if your monthly net income is $3,000 to $5,000, the maximum you should pay towards monthly credit card payments is $300 to $500. A total of 10% is the safe zone to keep your overall DTI ratio below 36%.
Even if you are earning a high income, it is important to keep your credit card debt in check. If your net monthly income is $7,500 to $10,000, your credit card payments each month should not exceed $750 to $1,000. If your debt continues to increase, it becomes more challenging to stick to your budget because it impacts your cash flow. You may face overdrafts, miss bill payments, and put off important things like doctor’s appointments.
How Much Credit Card Debt is Too Much for a Family?
The word “debt” has a negative connotation, as excess debt often leads to financial problems. But how much credit card debt is too much for a family? Generally, reasonable debt for families depends on many factors, such as your job stability, career prospects, financial obligations, saving and spending habits, and the stage of life your family is in.
Another important factor to consider here is the interest rate you're paying. High-interest debts such as credit cards can lead to spiraling levels of outstanding balances.
For single-income families, it is important to have conservative levels of credit card debt, even with job stability. One way to determine if you have too much debt is by using the 28/36 rule. Based on this rule, you should spend no more than 28% of your gross income on housing and no more than 36% of your gross income on housing plus total monthly debt payments.
For single-income families, this rule can be applied to net income for a conservative estimate. It is safer to calculate your spending and borrowing habits on take-home pay because this is what you’ll have disposable after deductions and taxes. For example, if your after-tax income each month is $3,125, you’ll need to keep all your housing and expenses to $1,125 or lower each month to avoid debt.
Dual-income families typically have more disposable income and financial stability. Use the 28/36 rule as intended, based on gross monthly income for the household, to determine how much credit card debt is too much for your family.
For example, if your total gross household income is $8,500 each month, you should aim to keep your housing and debt expenses to $3,060 or lower each month.
How Much Credit Card Debt Is Too Much for My Credit Score?
The amount of credit card debt you have will also impact your credit history and overall financial health. Here are a few ways you can determine if you're in a good spot financially:
Credit Utilization Ratio
When you use up a lot of your available credit, it indicates that you have a lot of debt. Your credit utilization ratio can deter lenders and also lower your credit score. Many credit card companies consider a credit utilization of over 30% to be high when you apply for new credit or a new card.
If you use over 30% of your available credit, but pay it off each month before it's reported to credit bureaus, you may still be in good shape. But having a high monthly credit utilization ratio indicates that you have too much debt. If you want to improve your credit score, your goal should be to bring down this ratio by paying off your debt as soon as possible.
Your payment history also has an impact on your credit report. If you find yourself trying to pay off one credit card debt with another, have late payments, or have multiple missed payments, you may have more debt than you should.
Not having enough money to make the repayment each month is a clear sign that you may need to get your spending under control. This is a good time to consider how you can correct this behavior through credit counseling. Look into debt repayment strategies like debt snowball and debt avalanche to clear off your credit card accounts once and for all.
Even if you're making minimum monthly payments but not much else, it could be a problem. Making minimum payments won't allow you to lower your debt load because it only covers the credit card interest charges and fees and maybe a tiny bit of your balance. Soon, your debt may become too much to handle when you follow this course.
If you find yourself in a situation like this, you may want to consider debt settlement or even bankruptcy. If your situation is not so dire, you may still benefit from getting in touch with a credit counseling agency or a personal finance expert to work out a debt repayment plan. Alternatively, you can also negotiate with your credit card issuer.
Paying Off Too Much Credit Card Debt
There is no magic number for how much credit card debt is too much. As a credit card holder, you should be aware of your spending habits and balances if you want to avoid the cycle of debt.
If your credit utilization ratio is more than 30%, or if you're not able to pay much more than the minimum balance, your debt may be too unmanageable. Depending on the amount of debt you have, you can consider taking out personal loans to clear your high-interest credit card bills.
After trying to get your balances under control, if you think you are not making headway in paying off your debts, consider making a strict budget and creating a debt payoff plan.
TurboDebt can help you jump-start your plan through debt relief services like debt settlement. Our experts can help you find the right debt relief option based on your financial situation. Connect with us today for a free consultation. Check out our reviews to see how our debt relief services have helped thousands of clients!