Do I Have Too Much Credit Card Debt?
Using credit or charge cards to pay for purchases is a fact of life in today’s economy. Credit cards are convenient and easy to use – so much so that, according to a 2020 Federal Reserve report, the average American household owes $6,300 in credit card debt.
But when something is too easy, people sometimes abuse it. Knowing when you’re in over your head with credit card debt, and when to seek help, are vital steps in your quest for financial freedom.
Signs You Have Too Much Credit Card Debt
How much credit card debt is too much? Different people have different ideas of what it means to carry a high balance. Several high balances on multiple credit cards could be a tell-tale sign you’re headed for trouble.
But what if you have high credit limits or a high income? Some factors apply to everyone, regardless of income or credit history.
Here are some of the signs that indicate you are in dangerous territory:
- High Credit Utilization Ratio (Current Total Balance / Total Limit): A high credit utilization ratio means you’re using more of your available credit than your lender is comfortable with. Most lenders would prefer your credit utilization to stay below 30%. This means if your limit is $1,000, you should keep the balance under $300.
- High Debt-to-Income Ratio (Total Monthly Debt Payments / Total Gross Monthly Income): How does your monthly income compare to the amount you spend on debt each month? Aim to keep your debt to income ratio (DTI) around 35%, but definitely below 43%. Research suggests that consumers struggle to make payments when their DTI climbs past 43%. This is also the highest ratio most lenders are willing to offer a qualified mortgage.
- High Credit Card Debt Ratio (Total Monthly Credit Card Payments / Total Net Monthly Income): This is like DTI, but you only consider your credit cards. The recommended ratio for credit cards is 10%. If your credit card payments alone are eating into a significant amount of your monthly income, it’s a sign you have too much credit card debt.
- Making only the minimum payments each month: You can avoid late fees this way, but interest continues to accrue. Making only minimum payments probably means your income is too low to sustain your debts. This is a huge sign you have too much credit card debt.
- Maxing out credit cards: Remember, we want to keep our credit utilization below 30%. Maxing out a credit card not only harms your credit score but also makes paying off credit cards much harder. Your minimum payments likely will increase, and a lower credit score means fewer debt relief options available to you.
- Using credit cards for cash advances: a cash advance is a short-term, high-interest loan taken against your line of credit. Cash advances come with many fees, and interest rates are often higher than they would be making a typical purchase. It’s not the best way to borrow money, so if you’re considering one, it likely means your bank funds are running low.
There’s an even more quantifiable approach to determining if you have too much credit card debt. InCharge’s Debt Consolidation Calculator will show you if a debt consolidation loan can save you money. There’s also an option to see if a debt management plan would be a better solution.
How To Review a Credit Card Offer
Investigate these details before obtaining a credit card:
Variable Rate or APR: The initial rate offered may increase after an introductory period or when the card company raises the “base rate.”
Grace periods: The disclosure defines the number of days before interest is charged on a new purchase. This helps you know when to pay your bill to avoid extra interest and fees.
Late payments: Beyond basic fees such as those for late or returned payments, the card company can automatically raise your interest rate if you miss or are late on two payments. There is also “universal default” when a late payment on one account leads to an increased interest rate on another account.
Credit limit: If your credit limit is $2,000 and you charge enough during a permanent change of station to raise the total balance to $2,020, you can expect a fee of $10, $20, or more.
How Do You Manage Credit Card Debt?
How do you manage credit card debt effectively? On The Balancing Act as Etta Money shares various credit card management solutions.
Consequences of Credit Card Debt
Credit card debt will diminish your cash flow and destroy your credit score if you don’t plan to act.
Here’s what can happen if you don’t pay back your credit card debt:
- Rapidly increasing debt: Credit cards offer a lot of flexibility in purchasing, which gives you the potential to amass large balances quickly. Since it’s revolving debt, your minimum payments likely will rise with the increase in your balance. The more you charge, the harder credit cards become to manage.
- Lower credit scores: Credit utilization is a crucial factor in calculating your credit score. The closer your balance gets to your credit limit, the higher your credit utilization ratio climbs and the lower your credit score drops. Anything above 30% may begin to alarm the credit bureaus and harm your credit score.
- Difficulty securing other lines of credit: If you don’t pay off your debts, lenders are less likely to offer you more credit. This means securing a mortgage or auto loan will get a lot harder.
- Legal trouble: If you go long enough without paying your credit card bill, your creditor may write it off as a loss and sell the account to a debt collection agency. These guys are aggressive. The Federal Trade Commission (FTC) receives more consumer complaints about debt collectors than any single industry. You could be sued for debt by collection agencies, which could lead to a lien on your property or having your wages garnished.
How to Get Out of Credit Card Debt
Credit card debt is surmountable if you take the proper steps and proceed with a concrete action plan.
Prioritize your payments. The most effective way to pay off your debt depends on your family’s finances and goals. If you’re still finding it hard to make all of your payments, consolidate credit with a nonprofit credit counseling agency.
Create a budget. Once you prioritize your debt payments, make a budget and – most important – stick to it. You must know where every dollar is going and be able to control excess spending.
Find extra money. After creating a budget that lists all your income and debts, you may be surprised at how much extra money you can find. Apply that extra money to pay off your cards.
Use the snowball technique. For example, say you have one payment of $50 a month and another at $75. Once you pay the $50 bill in full, you roll that $50 into paying off the second bill. Once that second bill is paid off, take that $125 and put it toward another debt. And so on and so on.
Talk to the credit card company. Call your credit card company before you start having payment problems. It shows you care about paying your debt responsibly, can buy you some time, and even lead to a mutual solution.
Discuss your credit card debt with a professional. If you’re curious about how you can save time and money on interest and late fees, consult a financial advisor or a nonprofit credit counseling agency.
About The Author
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
- Bhutta, N, Bricker, J, Chang, A. (2020, September) Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances. Retrieved from https://www.federalreserve.gov/publications/files/scf20.pdf
- N.A. (2019, November 15) What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/
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