How Much Credit Card Debt is Too Much?

There are three easy measures you can use to decide if you have too much debt.

Credit card debt has a way of creeping up to cause problems. Since credit cards are revolving debt, it means that your minimum payments increase the more you charge. As a result, credit card debt can slowly take over your budget. Minimum payments eat up all your free cash flow and leave you struggling to cover daily expenses.

But the challenge is that it’s not always immediately apparent that you have too much debt. There’s a fine line between staying afloat and sinking fast. So, how much credit card debt is too much and how can you tell?

3 ways to tell you have too much credit card debt

There are three simple ratios you can use to asses when you have too much credit card debt:

  1. Credit utilization ratio shows you when you have so much debt that it’s bad for your credit score.
  2. Debt-to-income ratio measures when you have too much debt to get approved for new credit.
  3. Credit card debt ratio tells you when your minimum payments are becoming too much for your budget to handle.

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

One way to tell you have too much credit card debt is when it starts to negatively impact your credit score. Credit utilization is the second biggest factor used to calculate 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

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 need to carry credit card balances to maintain a high credit score. If you pay off your debt in-full every month, it’s the best thing you can do for you 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.

Total credit limitMaximum debt that won’t damage your score
$1,000$300
$2,000$600
$3,000$900
$5,000$1,500
$10,000$3,000
$15,000$5,000
$20,000$6,000
$25,000$7,500

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 that you’re required to list as income on your tax returns. That includes benefits, Social Security, and child support or alimony payments you receive.

Debt includes any obligation that will take more than 6-10 months to repay. That can include rent or mortgage payments, including property taxes and insurance, auto loans, student loans, credit card payments, personal loans and even in-store credit lines for furniture or electronics.

Lenders won’t approve you if your debt-to-income ratio is over 43%, although for smaller lenders the cutoff can be lower. So, you want to keep your DTI below 36%. That gives you ample room to take on new credit, since lenders calculate DTI with potential new payments factored in.

You can also use DTI to tell when you have too much debt because your credit card balances have increased. Loans usually won’t bump you over, because lenders wouldn’t extend the loan. So, it’s usually credit card debt that puts you over the line.

If your balances get so high that you can’t borrow, you probably need credit card debt relief. Otherwise, if you need to buy a car or move to a new home, you won’t be able to meet those needs.

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

In general, you never want your minimum credit card payments to exceed 10% of your net income. Net income is the amount of income you take home after taxes and other deductions. You use net income for this ratio, because that’s the amount of income you have to 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.

Net (take-home) incomeHighest balance you should carry
$1,000$100
$2,000$200
$3,000$300
$5,000$500
$7,500$750
$10,000$1,000

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

As your credit card debt ratio gets higher, it becomes tougher and tougher to balance your budget. If you let your ratio get above, it’s likely to cause serious stress to your budget. You may be facing 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 Consolidated Credit’s Debt Quiz to See If You Show Signs of Too Much Credit Card Debt

Are debts causing arguments at home or making your home life unhappy?
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Have you reached or exceeded the maximum credit limits on your credit cards?
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Do you have any money in savings?
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Would you have enough money to cover 3 months of expenses if you had an emergency?
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Do you only pay the minimum amounts due on your credit card bills?
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Have you ever made unrealistic payment promises to creditors?
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Have you asked to borrow money to pay your debts off?
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Are creditors/collectors calling you regarding late payments?
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Do you worry your employer/family/friends will find out about your debt problems?
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Do you take out loans or buy on credit without consideration for the interest you will have to pay?
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Have you ever made a plan to pay off your debts, only to break it because the money gets used on expenses?
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Have you ever taken out cash advances or payday loans to make the payments on your credit cards?
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More Ways to Tell if You Have Too Much Debt

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:

  1. 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.
    1. Keep in mind that as you focus money to reduce one debt, you need to maintain minimum payments on the others.
    2. If you can’t make a plan to eliminate your debt within 5 years, then move on to Step 2.

  1. Evaluate do-it-yourself debt consolidation options
    1. 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?
    2. 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.
    3. If you can’t make either of these DIY options work, then you need help, such as credit counseling