How Much Credit Card Debt Is Too Much?

Using credit cards to cover expenses is a fact of life for many people. Credit cards are convenient and easy to use, but thanks to ultra-high interest rates, they’re even harder than ever to pay off. In 2024, the average credit card holder owes $6,329.

How much is too much when it comes to credit card debt? You never want to charge more than you can afford to pay off every month. If that ship has sailed, you might need to commit to a debt-payoff strategy or seek professional support.

What Is Credit Card Debt?

Credit card debt is the money you owe on your credit card account. You accrue this debt by using your credit card to make purchases. When you use the card, it might feel like you’re spending free money, but you’re really borrowing money that has to be paid back.

If you pay off the full balance by the credit card’s monthly payment due date, you don’t usually incur interest charges on your credit card debt. But if you only pay off part of the balance, you’ll be charged interest, and credit card interest rates are usually ultra-high.

The Impact of High Credit Card Debt

For some people, owing money on a credit card feels like it’s no big deal. In reality, credit card debt is some of the most expensive and potentially damaging debt you can have.

Here’s how high credit card debt can impact you:

• Ultra-high interest: The average interest rate you pay on credit card debt is 21.51% APR, and some cards charge nearly 30%. By comparison, personal loan rates are below 12% and car loans are near 6%.
• Debt cycle: Each month you fail to pay off your balance, your debt will increase due to interest charges. As a result, you might find it impossible to make progress toward becoming debt-free.
• Credit score damage: As your credit card balance increases, your credit scores usually fall. That’s because your debt-to-credit ratio, or the amount you owe in comparison to the total limit on the card, makes up 30% of your credit score calculation.
• Increased monthly payments: Your minimum monthly credit card payment is usually a set percentage of your total balance. As your balance increases, your monthly payment may go up, too.
• Financial insecurity: When you have credit card debt, it damages your ability to save money. Until the debt is paid off, it’s better to put all your free cash toward paying off the credit card, since the interest charges on the card will far outweigh any interest you can earn on a savings account or retirement plan.

How to Assess Your Credit Card Debt

If your goal is to pay off your credit card debt, you’ll need to first assess your debt. Understanding the details of your credit card debt will help you come up with the best plan for paying it off. Here’s what you need to know about each of your credit card accounts:

• Total amount owed
• Interest rate
• Minimum monthly payment
• Payment due date

You can find this information by logging into your credit card account or by viewing a digital or paper statement. If you’re unsure about who you owe debt to, you may want to pull your three, free credit reports from AnnualCreditReport.com to make sure you don’t miss anything.

Signs You Have Too Much Credit Card Debt

How much is too much credit card debt? The main sign you have too much credit card debt is that you can’t pay off the full balance each month. But it’s an even bigger problem if you find your balances growing instead of shrinking. Here are some red flags to be aware of.

High Credit Utilization Ratio

Your credit utilization ratio, also known as your debt-to-credit ratio, looks at how much you owe in comparison to your credit card limit. For example, if your credit card limit is $5,000 and you owe $1,000, your credit utilization ratio is at 20%.

To build good credit, FICO recommends keeping your utilization below 10%. As your ratio climbs higher, your credit scores will drop.

Growing Debt-to-Income Ratio

Your debt-to-income ratio (DTI) compares your minimum monthly debt payments to your monthly gross income. If your DTI is higher than 35%, you could have trouble qualifying for a mortgage. Even worse, you might find it difficult to cover your debt payments while also paying for your regular household expenses.

Making Minimum Payments

Making the minimum credit card payment will help you keep your account in good standing. You won’t be charged a late payment fee and take a big hit to your credit scores as long as you make the minimum payment. But you’ll still have problems.

If you only pay the minimum, you’ll incur interest charges on the unpaid balance, as well as any new purchases you make, every single day until you pay off the balance.

Maxing Out Credit Cards

Maxing out a credit card, or spending up to the maximum limit on the card, can create a whole new set of problems. If you exceed the limit, which will happen once you receive an interest charge, you’ll face over-limit fees and you won’t be able to use the card anymore. The creditor may also impose a higher, penalty APR. On top of that, you can expect to see a big drop in your credit scores.

Using Credit Cards for Cash Advances

Taking a cash advance against your credit card is one of the most financially risky moves you can make. A cash advance is a short-term, high-interest loan taken against your credit card. These loans come with many fees, sky-high interest rates, and the interest starts accruing from day one.

Healthy Debt Management Strategies

In times of financial stress, it’s tempting to look for a quick solution. Paying off debt in a healthy way isn’t always quick, but it can help you avoid scams and set you on a more stable path for the future.

Instead of choosing high-risk options like for-profit debt settlement, you might consider debt consolidation. With this approach, you use a personal loan to pay off your credit card debt. By doing so, you can significantly reduce your interest charges and therefore pay off the debt faster.

Another healthy way to get help is by talking to an NFCC-certified credit counselor. Your counselor can assist you in a handful of ways, including:

• Coaching you on how to ask creditors for hardship assistance.
• Creating a budget with you that’s focused on eliminating debt
• Enrolling you in a structured debt management plan (DMP) that allows you to pay off your credit cards in 3-5 years.
• Discussing options like debt settlement and bankruptcy.

When to Seek Professional Help

Professional help is available at any time! You don’t have to wait until you’re in a crisis to seek it out. Here are some great options to consider:

Credit counseling

Certified credit counselors are available for anyone who wants to improve their finances or credit. A counselor can help you find ways to reduce your debt and avoid missing debt payments. If you’ve already fallen behind, they can help you get back in good standing, dismiss late fees, and more.

Creditors

It’s crucial to seek help when you’re facing a hardship, like unemployment, a recent divorce, or a medical emergency. If you call the credit card company about your situation, they might be willing to reduce or pause your payments.

Emotional support

A 2024 survey from Ally Bank found that 46% of U.S. adults let their emotions influence their spending, and yet 36% never seek emotional support related to their finances.

If you’re ready to find and address the root causes of your debt issue, now is the time to try any or all of these resources:

• Ally Bank’s free, four-part webinar series called Money Roots, which was developed with the help of financial psychology experts.
• Financial therapy
• Debtors Anonymous meetings

Preventative Measures to Avoid Excessive Debt

It’s easier than ever to fall into a cycle of credit card debt. To avoid this trap, you’ll need to be proactive about your finances. Instead of waiting for things to get bad, keep your focus on building a strong safety net that prevents you from relying on debt.

Here are some ways to avoid falling into excessive debt:

• Income growth. Due to inflation, the costs of goods and services increase every year. If your income doesn’t grow, you’ll find yourself struggling more to cover expenses each year. To avoid this problem, make it your goal to increase your income every year, whether through promotion, switching job fields, or otherwise.
• Emergency fund. Avoid relying on debt for emergencies by building an emergency fund. You can start small, by automatically depositing as little as $25 from each paycheck into a savings account. But aim to increase the contribution annually or any time your finances improve.
• Aggressive downsizing. Instead of cutting small costs like coffee and Netflix, think big. You can make a major, positive shift in your finances by reducing your biggest expenses. For example, you might share a room for a year or sell your car and ride a bike to work.
• Loud budgeting. Follow one of the few helpful FinTok trends of “loud budgeting,” which involves letting your friends and family know when you need to opt out of an activity because of your budget. One study found that Gen Zers save $629 a month on average by following this trend.

How to Get Out of Credit Card Debt

Credit card debt can be conquered with a concrete action plan. If you’re ready to make debt payoff a priority, here’s how you can start knocking out those balances:

1. Get professional input. Talk to an NFCC-certified credit counselor to explore all of your options. They may advise talking to your creditors, debt consolidation, or if you’re unable to afford debt payoff within a few years, they can help you explore bankruptcy.
2. Prioritize your payments. If you’re going it alone, get organized. If you have multiple credit cards, list them all out. including the balances you owe on each card and the interest rates.
3. Choose a payment strategy. To reduce your overall interest charges and pay off debt faster, go with the debt avalanche strategy, which involves paying extra money to the card with the highest interest rate while making minimum payments on the other cards. If you’re more concerned about not being able to stick to your plan, try the snowball technique, or paying extra to the card with the lowest balance, since this strategy can keep you motivated by helping you pay off whole accounts faster.
4. Adjust your budget. Keep looking over your financial statements to find costs you can cut and ways to increase your income. The more money you free up for debt payments, the faster you’ll reach your goal of being debt-free.

Next Steps in Managing Your Credit Card Debt

If you’re facing a mountain of credit card debt, don’t throw in the towel. There are fantastic and free professional resources available to help you make sense of the problem and start finding your way out.

The next step might be talking to a credit counselor or letting your friends and family know that your budget has changed. Either way, you don’t have to go it alone.