How much credit card debt is too much?

A credit card is one of the most convenient forms of debt in the world. As a result, it’s very easy to rack up a large balance. But how much credit card debt is too much? Keep reading to find out.

How much credit card debt is too much?

In an ideal world, you wouldn’t have any credit card debt. According to Wallethub, the average new credit card comes with an interest rate of 17.98%. This can leave you paying hundreds of dollars in interest per year on even a modest balance, making credit cards among the most expensive types of debt out there.

Of course, in the real world, many people carry credit card balances. This debt is dangerously excessive when any of these statements are true:

  • your credit utilization ratio is 30% or higher
  • your debt-to-income ratio is 43% or higher
  • you can’t afford to make more than the minimum payment
  • you’ve been using one card or loan to pay another
  • you’re uncomfortable with your balance

Let’s look at these statements individually and discuss why they’re so problematic.

Your credit utilization ratio is 30% or higher

Your credit utilization ratio is the percentage of available revolving credit you’re currently using. Say, for example, you have a $4,500 balance spread out across three credit cards with $5,000 limits. Your total available revolving credit is $15,000. Your balance of $4,500 represents 30% of this amount. In other words, you have a credit utilization ratio of 30%.

Remember, only revolving credit factors into this calculation. These are loans that don’t close once you’ve paid them off but, rather, allow you to borrow on a continual basis. Your credit card is one such form of revolving debt. Car loans, student debt, and mortgages, meanwhile, are installment loans and have no bearing on your credit utilization ratio.

Generally, you don’t want a credit utilization ratio above 30%. According to Experian, lenders see anything higher as evidence that you’re having difficulty managing your finances.

Here’s what following this guideline looks like at various levels. The danger zone is the point at which your debt touches 30% of your available credit.

Total available creditDanger zone based on the 30% rule
$1,000$300
$2,000$600
$3,000$900
$4,000$1,200
$5,000$1,500
$8,000$2,400
$10,000$3,000
$20,000$6,000

Many people don’t realize debt works like this. They assume that available credit is, well, available for use without penalty. This isn’t the case, though.

In fact, having a credit utilization ratio of 30% or more decreases your chances of getting additional loans at favorable rates. This will leave you paying substantially more for life’s major purchases such as cars and homes.

This is about more than just getting additional loans, though. If you’re carrying such a high balance out of necessity, lenders are correct in assuming you’re having trouble managing your finances. You’re teetering on the edge of greater problems. An emergency that forces you to take on additional debt could push your monthly payments into unsustainable territory.

“But my credit limit is so low!”

Of course, it’s easy to end up with a utilization ratio above 30% if you don’t have much available revolving credit. However, there’s a reason your limit is so low. Credit card companies choose that number based on what they believe you can comfortably manage. They don’t pull it out of a hat.

You can always call and request a review if the limit seems unfairly low. However, don’t use a low limit as an excuse to overextend yourself.

Your debt-to-income ratio is 43% or higher

Your debt-to-income ratio is the percentage of your gross monthly income that goes towards all debt repayments. That includes revolving loans like credit cards but also installment ones like your mortgage or car payment.

If your debt-to-income ratio is 43% or higher and a substantial portion of this is credit card debt, you’re in a bad spot.

For one, if such a large chunk of your income is going towards minimum payments on a credit card, your balance is probably substantial. Compounding interest on that amount at the double-digit rates credit card companies charge will crush your ability to build wealth.

I mean, if you’re in this situation, how much are you really saving or investing? Not much, right?

Additionally, having a debt-to-income ratio above 43% limits your ability to get favorable loans in the future. According to Investopedia, lenders generally prefer consumers with debt-to-income ratios below 36%.

Here’s what following the 43% guideline looks like at various income levels. The danger zone is the point at which your monthly debt payments – all of them combined, not just your credit cards – touch that percentage of your gross monthly income.

Gross monthly income (pre-tax)Danger zone based on the 43% rule
$2,000$860
$4,000$1,720
$6,000$2,580
$8,000$3,440
$10,000$4,300

You can’t afford to make more than the minimum payment

If you can only afford to make the minimum payment on your credit card balance, you have way too much debt and will likely be trapped for years. Here’s how the math works.

Let’s assume you have a $5,700 credit card balance. The card’s interest rate is 17.98% and minimum payments amount to 2% of your total balance.

Well, if you stuck to only making minimum payments, it would take you more than 30 years to pay off your balance. And despite only borrowing $5,700, you’d pay back a total of $19,967.60. That’s the devastating impact of compound interest at a rate of 17.98%.

You know what’s even scarier? These are all typical numbers. According to Value Penguin, American households carry an average credit card balance of $5,700. You’ll recall from earlier that 17.98% is the average interest rate on new credit cards. Lastly, minimum payments hover between 2% and 4% of a card’s balance.

Even scarier still is the reality that if you can’t afford to exceed your minimum monthly payment, you probably can’t withstand a financial emergency, either. Such an emergency – which happens to all of us eventually – could render you unable to make any credit card payments at all.

You’ve been using one credit card to pay another

It’s possible to maintain an illusion of fiscal responsibility by bouncing debt from one credit card to another. However, having to do this is a clear sign you’ve over-extended yourself.

First of all, you can’t pay one credit card with another directly. You’d have to take out a cash advance or perform a balance transfer. Both of these options are unsustainable.

According to Investopedia, some credit card cash advances come with interest rates as high as 30%. Additionally, credit card companies often charge cash advance transaction fees between 2% and 4%. In other words, it’s highway robbery. If you feel forced to accept this absolutely rotten deal because the alternative is falling behind on your credit card payments, you’re in over your head.

The case against balance transfers is a bit more nuanced. Many credit card companies offer promotions allowing you to pay 0% interest on any transferred amounts for a set period. This can give you time to catch up.

However, it can also lull you into a false sense of security. Unless you close the original card after transferring its balance, there’s nothing stopping you from racking up debt on it again. Opening up a new card exposes you to similar risks; how can you be sure you won’t start spending with it?

The answer is that you can’t be sure unless you’ve addressed the issues that prompted you to have too much credit card debt in the first place.

Again, though, even if you do everything right with a balance transfer, your having to rely on it to get your credit card debt under control means you had way too much.

You’re uncomfortable with your balance

It’s possible to have too much credit card debt even if none of the previous statements are true. As long as you’re uneasy about the amount of debt you’re carrying, it’s excessive.

Personally, any amount of credit card debt bothers me if the disposable income from my next paycheck isn’t enough to pay it off completely. Given how aggressively I invest, all it takes is a few hundred dollars to put me in the danger zone as far as I’m concerned.

Even though that amount of debt would be negligible in terms of my credit utilization and debt-to-income ratios, it doesn’t sit well with the financial goals I have for myself.

Perhaps you’re like me, with a comfort zone far more conservative than the conventional markers of too much credit card debt. There’s nothing wrong with that. In fact, you should work on eliminating your credit card debt with as much ferocity as those in more dire situations.

What to do if you have too much credit card debt

Alright, let’s say you’ve gotten to this point in the article and concluded that you, indeed, have too much credit card debt. Here’s what you can do about it.

Get organized

If you have too much credit card debt, your first order of business is to organize your finances. Check out this article for some guidance on achieving this. The key areas you need to focus on are:

  • listing your monthly bills
  • identifying the appropriate priorities
  • using budgeting tools
  • eliminating debt using proven strategies (i.e. snowball method)
  • being mindful of automated bill payments
  • using mental accounting to your advantage

As you work through these steps, keep an eye out for any possible explanation as to how you ended up with an excessive amount of credit card debt.

For example, do you have too many automated bills hitting your credit card at the same time? Or perhaps in the process of budgeting, you discover you’ve been way overspending in specific categories. Whatever you discover, make note of it.

If you approach each of the steps in my article on organizing your finances with this in mind, you’ll immediately feel more in control of your financial destiny.

Stop using your credit card

Once you know exactly what you’re dealing with financially, it’s time to get serious. Specifically, stop using your credit card. Otherwise, any progress you make towards eliminating the balance will just be offset by your continued spending.

Some people find it helpful to cut their credit up so they can’t use it. I’d go one step further and remove your credit card information from any digital wallets so you can’t use it online either.

“But Brandon,” you might be thinking. “What if I have an emergency?”

You can always call your credit card company and have them ship you a new card quickly. Trust me, they won’t give you a hard time about that. By forcing yourself to go through that step, however, you reduce your ability to spend impulsively. As a result, you’ll be able to focus on obliterating the debt much faster.

Act quickly if you can’t make payments

If your credit card debt has gotten so excessive you can’t keep up with monthly payments, you need to act fast. Read this article for some tips on getting caught up.

One often-overlooked strategy is to contact your credit card provider and explain your situation (see the third point in that article I linked above). They might have more sympathy and flexibility than you’d expect.

It’s a much better approach than letting yourself slip behind and hoping things somehow work out on their own. They never do. You have to be proactive and reach a suitable arrangement with your creditors.

One approach some credit card companies take is to offer you what’s known as a workout agreement. This involves reducing – or even completely eliminating – your interest rate and bringing your monthly payments down to a more manageable level.

Yes, you read that correctly. Credit card companies often do these things (and more) for people. Pick up the phone.

Be very strategic about balance transfers

As I mentioned earlier, balance transfers can be helpful when you approach them the right way.

You’ll want to find a new card that charges no balance transfer fee and has a low introductory interest rate (ideally 0%) that will not rise above the APR on your existing credit card once the promotion is over. This will buy you some time to make payments without having your balance grow exponentially.

Of course, be sure to contact your existing credit card company before going this route since – as I mentioned earlier – it’s very possible they’ll slash your interest rate.

If you do go the balance transfer route, I’d recommend cutting up your new card so you’re not tempted to begin spending with it.

Consult with a professional

If you’re really not sure how to proceed with eliminating your credit card balance, don’t be afraid to consult with a debt counselor. They can direct you towards resources such as debt consolidation loans based on your situation. This type of one-on-one advice can be tremendously helpful.

Aim to be more responsible with your finances going forward

Once you’ve acknowledged your credit card debt problem and made strides towards addressing it, you should aim to become more fiscally responsible all around. Read this article for a list of 10 healthy financial habits to adopt.

If you’re capable of identifying an issue with your credit card balance, all of those habits are well within your reach.

Conclusion

I hope this article has helped you determine whether you have an excessive credit card balance and, if so, what to do about it.

If it’s any comfort, you’re certainly not alone in this. In fact, millions of people across North America struggle with excessive credit card debt. You don’t want to be like them, though. You want to achieve financial independence at some point, which simply isn’t possible when you’ve got massive amounts of credit card debt hanging over your head.

Check out some of my other articles for tips on improving your finances. No matter how much credit card debt you have today, we can build a much more prosperous future!

About the author

Brandon-Richard Austin

Brandon-Richard Austin is the founder of Rinkydoo Finance. He is an avid investor and digital marketer for startups and publicly-traded companies alike.