If you’re working to pay off credit debt, you aren’t alone. About 43.4% of credit card accounts carry a balance, according to 2022 data from the American Bankers Association. And in 2023, Americans’ total credit card debt topped $1 trillion, according to Federal Reserve data.
But when does some credit card debt turn into too much debt? There’s no simple answer — it’s different for everyone. However, there are a few simple rules of thumb you can use to decide. Additionally, there are several steps you can take to reduce your credit card debt, even if it’s overwhelming.
How much credit card debt is too much?
There’s not necessarily a dollar amount that tips the scale of too much credit card debt. Instead, a sign you have too much debt is if it's negatively affecting other areas of your personal finances, such as necessities and other bills. But beyond that, there are other factors that can signal too much debt.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is the portion of your gross monthly income that goes toward debt, including your credit cards, student loans, personal loans, auto loans, mortgages, and any other debt payments you have.
Your DTI is an important figure that lenders look at when deciding whether to approve your loan applications. A high DTI can preclude you from qualifying for new debt accounts.
Good to know: A good DTI is generally considered to be anything below 36%, but you can qualify for certain loans with one that’s higher.
Credit utilization ratio
Your credit utilization ratio refers to how much of your available revolving credit you’re using. For example, if you have a credit card with a $1,000 limit and a balance of $500, you have 50% credit utilization.
Your credit utilization is an important factor that determines your credit score — it makes up 30% of the score calculation.
Generally speaking, a credit utilization below 30% is considered good and can help you qualify for additional loans and credit cards. However, FICO recommends a score below 10% to ensure you’re able to build and maintain a good credit score.
Tip: While a high credit utilization can negatively impact your credit score, so can a credit utilization of 0%. It indicates you don’t use your credit cards, which doesn’t necessarily show lenders or credit scoring systems how responsibly you use debt.
Unaffordable minimum payments
One of the surest signs that you have too much credit card debt is that you can’t make your minimum payments.
Failing to make your minimum payments each month can have several negative repercussions, including late fees and a higher interest rate. Your credit card company is also likely to report your late or missed payments to the credit bureaus, which will lower your credit score.
If you fail to make your payments for too long, your credit card company may send your account to collections and close your account, which will only damage your credit score more.
Unfortunately, for large credit card balances, making just the minimum payment also isn’t really enough. While you may not experience the negative consequences of not paying at all, you won’t see your balance shrink significantly. In fact, by making just the minimum payment on a large credit card balance, it could take you many years to pay off the whole thing.
Good to know: Because of the high interest rates and compounding interest on credit cards, it can be challenging to move the needle, and you can only do it in a significant way by paying more than the minimum each month.
Tips for managing and reducing credit card debt
If you’re struggling with overwhelming credit card debt, there are options you can pursue to address it head-on and finally start making progress.
- Get on a budget: It’s impossible to fully take control of your finances without knowing where your money is going. Make yourself a budget based on how much you want to spend each month, including how much you want to put toward debt. Then, track your spending throughout the month to ensure you’re staying on track.
- Increase your debt payments: You’re also not likely to make progress on a large credit card balance without paying more than the minimum payment. See where you can find extra money in your budget to put toward your credit card debt each month.
- Consolidate or refinance your debt: A debt consolidation loan can help you reduce your debt burden by consolidating your credit card debt all in one place. You may also qualify for a lower interest rate, which means a lower monthly payment. This can significantly reduce the time it takes to pay off your debt.
- Transfer your balance: A balance transfer credit card allows you to transfer your debt from one card to another and pay 0% for an introductory APR period, usually for anywhere from six months to two years. If you pay off your card in that period, you’ll pay no interest on your credit card debt, helping you pay it off more quickly.
- Try debt payoff methods: The debt snowball and avalanche methods are two popular debt payoff strategies. The debt snowball is where you prioritize your smallest debts first, while making minimum payments on all your other debts, and the debt avalanche is where you prioritize the debt with the highest interest rate (which, for most people, is credit cards).
- Seek professional help: If you feel you aren’t making progress on your own, consider seeking professional advice or credit counseling. Not only can someone provide objective advice, but they may also be able to connect you with a debt management plan or another tool to help you manage your debt.
Learn More: Ways to Consolidate Credit Card Debt
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