How Much Credit Card Debt is Too Much?

Credit utilization ratio: Too much debt is bad for your credit score

One way to tell you that your credit card balances are too high is when they negatively impact your credit score. Credit utilization is the second biggest factor in calculating your credit score after credit history. It counts for 30% of the “weight” in your credit score.

Credit utilization = current total balance / total credit limit

For example, if you have three credit cards that each have a limit of $1,000, your total credit limit is $3,000. If you have a $200 balance on each card, your current total balance is $600. So, you divide $600 by $3,000, which equals 0.2; that means your credit utilization ratio is 20%.

A lower credit utilization ratio is always better. In fact, it’s a myth that you must carry credit card balances to maintain a high credit score. Paying off your debt in full every month is the best thing you can do for your credit.

By contrast, it hurts your score when your balances are too high. Anything over 30% credit utilization will decrease your credit score. So, you can use this as a measure of when you have too much debt.

Consolidated Credit offers a free credit card debt worksheet that makes it easy to total your current balances and credit limit. The 30 percent threshold applies to your total debt and each account. You want to maintain a balance of less than 30 percent on each card.

Download Consolidated Credit’s free credit card debt worksheet »

Debt-to-income ratio: When your debt is so high you get rejected

Debt-to-income ratio (DTI) is the measure that lenders use to decide if you should be approved for a loan. Lenders don’t extend credit to people who already have too much debt. They use DTI to measure it because they don’t want consumers to borrow more than they can afford to pay back.

Debt-to-income = total monthly debt payments / total gross monthly income

Gross monthly income is what you make before your employer takes out taxes and other deductions. You can find gross income listed on your pay stubs. It also includes anything you must list as income on your tax returns. That includes benefits, Social Security, and child support or alimony payments you receive.

Download and Consolidated Credit’s income worksheet »

Debt includes any obligation that will take more than six to 10 months to repay. This can include rent or mortgage payments, property taxes and insurance, auto loans, student loans, credit card payments, personal loans, and even in-store credit lines for furniture or electronics.

Download Consolidated Credit’s free borrowing worksheet »

Credit card debt ratio: When you can’t afford your monthly payments

You don’t want to check your debt-to-income ratio every time you make a few charges. So, there’s an easier ratio you can use to measure when you have too much credit card debt. It’s your credit card debt ratio.

Credit card debt ratio = Total monthly credit card payments / total net monthly income

Generally, you never want your minimum credit card payments to exceed 10 percent of your net income. Net income is the income you take home after taxes and other deductions. You use the net income for this ratio because that’s the income you must spend on bills and other expenses.

When credit card payments take up too much of your income, it makes it difficult to afford all the things you need to pay for each month. This makes credit card debt ratio the easiest measure of when you have too much credit card debt.

Now, just because your minimum payments are higher than 10%, it doesn’t mean you’re facing financial distress. Ten percent is the safe zone for keeping your overall DTI below 36%.

As your credit card debt ratio increases, balancing your budget becomes tougher and tougher. If you let your ratio get above, it’s likely to cause serious stress to your budget. You may face overdrafts, juggling bills, or putting off things like doctor’s appointments or car maintenance. Any of these actions are sure signs you have too much credit card debt.

Take this quiz to assess your debt

More ways to decide if you have too much debt

Consolidated Credit uses the 10% monthly payment measurement. This method allows you to 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 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

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.

Most experts would tell you this is not an efficient or effective debt elimination strategy because it takes too long and costs too much.

Steps to a debt-free future

Taking control of your credit card debt is achievable with a structured approach. These steps will guide you through assessing your situation, exploring DIY solutions, and recognizing when professional help is necessary for effective debt elimination.

STEP ONE: Understand your debt

• Begin by calculating the time it will take to eliminate each credit card debt using our Credit Card Debt Calculator. This will provide a realistic view of your current situation.
• Evaluate both your minimum payment obligations and what you can comfortably afford to pay. This will help you determine a feasible repayment strategy.
• Create a budget to ensure you can maintain minimum payments on all cards while focusing on accelerated repayment for one. This step is crucial for financial stability.

Key Decision Point: If you cannot devise a plan to eliminate your debt within 5 years, proceed to Step Two.

STEP TWO: Explore DIY solutions

If you have a good credit score, consider these DIY debt consolidation options:

• Balance Transfer Credit Cards: Determine if you can transfer balances to a 0% or low-APR balance transfer card and pay them off before the promotional period ends. Calculate if this option saves you money.
• Personal Consolidation Loans: Find out if you qualify for an unsecured personal loan with affordable monthly payments and a term of 5 years or less. Calculate your potential savings. Don’t forget to take fees into consideration.

If you don’t have a good credit score, there are still DIY options available to you:

• Negotiate with your creditors: Contact your creditors and explain your situation. They may be willing to work with you by lowering interest rates, creating a payment plan, waiving late fees. Creditors are not obligated to work with you, but it doesn’t hurt to explore this option.

Key Decision Point: If these DIY options are not viable, move on to Step Three.

STEP 3: Seek professional help

When DIY methods won’t work, there’s no shame in contacting a professional. Remember, seeking professional help is a sign of strength, not weakness, and it can be the most effective way to regain control of your finances.

• Credit counseling: Credit counselors can provide personalized guidance, help you develop a budget, and go over your debt relief options with you. If appropriate, they can also enroll you in a debt management program.
• Financial advisor: These professionals offer comprehensive financial planning, including debt management, investment strategies, retirement planning, and overall financial goal setting. They can help you create a long-term financial plan and provide guidance on various financial products and services.
• Student loan specialists: These specialists can help with understanding and navigating student loan repayment options, including income-driven repayment plans, loan consolidation, and forgiveness programs.
• Debt settlement companies: Debt settlement companies negotiate with creditors to settle debts for less than the full amount owed. Be aware that this option will lower your credit score.
• Bankruptcy attorney: If debt is overwhelming and other options are exhausted, a bankruptcy attorney can advise on bankruptcy proceedings (Chapter 7, Chapter 13). They can explain the legal implications of bankruptcy and guide you through the process.