Hi, I’m April Lewis-Parks, Director of Education at Consolidated Credit. Today we’re answering a consumer question and the question is, “How much debt is too much?”
And really, at Consolidated Credit, we think any amount of credit card debt is too much. But ideally you should never pay more than 10% of your monthly income toward credit card debt. So, for example, if you take home $2,500 per month, then you should never $250 per month to your credit card bills.
You know, you don’t need to have credit card debt or a revolving credit card to have a high credit score. If you do charge, pay it off every month at the end of each billing cycle. And if you can’t manage that, use a card with the lowest APR and then pay it off in several billing cycles as quickly as possible.
How Much Credit Card Debt is Too Much?
Knowing when it’s time to draw the line with revolving debt.
These free resources help assess your current debt level to see if you need to ask for help:
- Credit Card Debt Repayment Calculator
Learn how fast you can eliminate with different monthly payments and how much your plan will cost with total interest charges factored in.
- Debt Quiz
Take this interactive quiz to see if you can address challenges with debt on your own or if it’s time to seek help.
The unsustainable debt threshold
Credit card debt analysis experts at WalletHub have identified a specific dollar amount of credit card debt that the average American household can carry and still stay afloat. According to those analysts, the maximum amount of credit card debt that a household can hold without risking financial distress is $8,428.
However, keep in mind that this is the maximum sustainable debt for the average American household. Your household is likely to be different, depending on your income and other obligations. That’s why Consolidated Credit uses the 10% monthly payment measurement. This method allows you match your maximum credit card debt threshold to your income.
But let’s look at the maximum threshold to see what it means:
- If you have $8,428 in credit card debt, the required monthly payments would be $206.20. That’s calculated using a standard credit card payment schedule.
- This means you would need to bring home at least $2,062 per month in order to comfortably maintain those payments ($2,062 X 10% = $206.20)
- However, keep in mind that even if you made that a fixed payment amount and paid that every month:
- It would take 62 payments (over 5 years) to eliminate the debt
- You would pay $4,442.56 in total interest charges
Most experts would tell you this is not an efficient or effective debt elimination strategy because it takes too long and costs too much.
The 5-year debt elimination plan
Another measure of too much debt that experts use is often the 5-year threshold. Basically, you should be able to eliminate debt in-full within 5 years or less . This is based on the idea that if it takes longer than five years you aren’t eliminating the debt efficiently. It will also cost too much with total monthly interest charges.
With that in mind, take the following steps to assess your personal credit card debt level. This can help you see if you need help to eliminate debt effectively:
- Use the Credit Card Debt Calculator to see how long it would take to eliminate each credit card debt you have. Assess both minimum payments and what you can comfortably afford to pay.
- Keep in mind that as you focus money to reduce one debt, you need to maintain minimum payments on the others.
- If you can’t make a plan to eliminate your debt within 5 years, then move on to Step 2.
- Evaluate do-it-yourself debt consolidation options
- If you transferred your balances to a balance transfer credit card with a 0% APR introductory period, could you eliminate the total balance before that introductory period ends?
- Failing that, is your credit score high enough that you can qualify for an unsecured personal debt consolidation loan? You would need monthly payments you can afford and a term of 5 years or less.
- If you can’t make either of these DIY options work, then you need help, such as credit counseling
A note on credit utilization ratios
Another important point to note when talking about how much debt you should have at any given time is that your credit utilization ratio is a key factor in your credit score calculation. A credit utilization ratio simply refers to the amount of debt you have versus the credit limit you have available.
So if you’re credit limit is $10,000 and you have $2,000 in debt, then your utilization ratio would be 20 percent. If you have $5,000 of debt, then your ratio is 50 percent.
Credit utilization is the second most critical factor in the calculation of your credit score after credit history. With that in mind, having too much debt is actually bad for your credit score. That means if you’re holding a lot of debt, you may not be able to qualify for a mortgage, auto loan or other financing at the interest rates and terms you really want.
Ideally, you should keep your credit utilization ratios below 10 percent, but anything more than 30 percent may likely begin to weigh negatively on your score – and anything above 50 percent utilization is downright bad for you and your credit. In a best-case scenario, you should maintain a balance of less than 30 percent on every card you have, which will also keep you overall utilization below 30 percent as well.
We’re here if your balances get too high
The primary rule you always want to follow with credit card debt is that you never want to let debt get so high that you can handle the monthly payments comfortably in your budget. If you see minimum payments are eating more than 10 percent of your income or high credit utilization ratios are dragging down your credit score, we can help. Call Consolidated Credit today at or ask for help through our online application.