How Much Credit Card Debt Is Too Much?

Credit cards are convenient. They might offer rewards for using them. They are convenient and make it easy to spend in-person and online. Credit cards can be a great way to pay for things but a terrible way to finance things. Credit card interest rates tend to be higher than those of other types of financing, and their low minimum payments can keep unwary consumers in debt for years, even decades.

So, how do you know when you have too much credit card debt?

The Problem With Having Too Much Debt

Let's face facts: Most Americans possess and increasingly rely on credit cards to pay for items on demand. According to Federal Reserve research, they are simple, easy, and quick to use. The average American household owes $6,270 in credit card debt today. And without discipline, that debt can become problematic.

“Having debt isn’t necessarily the issue. The problem arises when people become incapable of paying it off,” says Lyle Solomon, a financial expert and attorney with Oak View Law Group in Rocklin, California. “When debt becomes a burden rather than a source of value, it might become too difficult to bear.”

Solomon and others recommend keeping debt within acceptable limits and exploring ways to manage and pay down your debt so that the financial burden does not become overwhelming. But that begs the question: How much credit card debt is too much?

Learn how to get credit card debt relief.

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Too Much Credit Card Debt: Warning Signs

Several red flags indicate you may have excessive credit card debt. These include:

1. Your debt-to-income (DTI) ratio is high.

2. You carry balances on your cards because you spend more than you earn.

3. Your cards are maxed out or close to it.

4. You always make only the minimum payment on your credit cards.

5. Your credit score is dropping because of high utilization.

6. You’re using new credit cards to pay old credit cards.

7. You’re using credit cards for cash advances.

8. You are not able to make minimum payments on time.

9.  Your credit card debt is making you anxious.

Warning sign #1: Your DTI is high

It’s essential to determine your debt-to-income (DTI) ratio to see where you stand financially. You calculate DTI by adding your total monthly debt payments (credit card minimums, mortgage debt or monthly rent, and other loan payments, but not living expenses like food or utilities). Then you divide this total by your gross (before tax) monthly income.

If your DTI ratio is less than .36 (36%), your debt burden is likely within the healthy range, and you should be able to pay it off with your income.

“Aim to maintain a DTI of roughly 35% or lower, but no more than 43% or you will likely find it difficult to make payments,” suggests Solomon.

Warning sign #2: You carry balances on your cards because you spend more than you earn

You want to avoid carrying balances on your credit cards from month to month; instead, aim to pay off your balance in full each month.

“Unless you have no choice, carrying a balance is a terrible idea. Work to adjust your lifestyle instead of spending frivolously,” advises Erik Sussman, a certified financial planner and CEO/founder of the Institute of Financial Wellness based in Fort Lauderdale, Florida.

Warning sign #3: Your cards are maxed out or close to it

“Not only can maxing out a credit card hurt your credit score, but it also causes difficulties in paying down the credit card. Your minimum payments will almost certainly increase, and the poor credit score that results will indicate that you have fewer debt-relief options,” cautions Solomon.

That’s why it’s crucial to keep your credit card balances as low as possible. He adds, pay with cash or a debit card when you can, or avoid the impulse to use your credit card for purchases.

Warning sign #4: You always make only the minimum payment on your credit cards

The experts agree: It’s always best to try to pay off your credit card balance in full each month instead of merely making the minimum payment required on the card.

“Making the minimum payment doesn’t make much sense – unless you are in survival mode – because the interest rates on the card will be so high that it will be difficult to get the debt paid off,” Sussman notes.

Warning sign #5: Your credit score is dropping because of high utilization

In addition to your DTI, it’s wise to check your credit utilization ratio, calculated by dividing your total credit balance by your total credit limit.

“When you have a high credit utilization ratio, you are utilizing more of your credit limit than your lender allows, which causes your credit score to drop,” Solomon explains. “Most creditors recommend that you keep your credit usage below 30%. For example, if your credit limit is $1000, you must maintain your balance below $300.”

Warning sign #6: You’re using new credit cards to pay old credit cards

This strategy could make sense if you are making an effort to pay down your debt and the old cards charge higher interest rates than your new cards, Sussman says. But otherwise, this is a case of “robbing Peter to pay Paul" and won’t get you out of your debt problem.

Warning sign #7: You’re using credit cards for cash advances

A cash advance is a convenient, short-term loan against your credit limit. However, cash advances have a painful cost due to their high interest rates.

“This is not the ideal way to borrow more money,” recommends Solomon. “Consumers should always avoid taking out cash advances. If you need urgent cash, it’s better to take out a low-interest personal loan than opt for cash advances.”

Warning sign #8: You are not able to make minimum payments on time

“Typically, this is a major signal that things are going poorly. Always try to pay at least your minimum balance punctually and pay down debt on your smallest balance first,” Nate Tsang, founder/CEO of Wall Street Zen, says.

Warning sign #9: Your credit card debt is making you anxious

It’s only a matter of time before expanding credit card debt begins to cause anxiety over your inability to pay down your balances. And that anxiety spikes even higher if you are being sent to collections and are receiving collection calls at work.

“The last thing you should do is use credit cards frivolously just to keep up with the Joneses. That can cause problematic financial stress. It makes better sense to live within or sometimes even below your means, if possible,” adds Sussman.

How to Take Control of Your Credit Card Debt

Do any of these red flags apply to you? Getting in over your head with credit card debt? Don’t despair: There are strategies you can pursue to get a handle on this problem, improve your finances, and safeguard your credit, such as:

• Debt acceleration (snowball and avalanche)

• Debt consolidation

• Credit counseling and debt management plans

• Debt relief (debt settlement)

• Bankruptcy (Chapter 7 and Chapter 13)

Debt acceleration (snowball and avalanche)

Many consumers follow two popular debt repayment methods: debt snowball and debt avalanche.

“The fundamental idea behind a debt snowball is to contribute as much as possible toward your debt balances every month until everything is completely paid off,” Solomon says. “Credit card debt balances are arranged in a debt snowball from smallest to highest debt balance. You contribute as much as you can every month on that balance, paying off the smallest at first then targeting the next smallest, and so on, until you are debt-free.”

However, interest rates are not considered with the debt snowball approach. That’s why many experts endorse a debt avalanche strategy, “which involves paying off your debts with the highest interest rates first,” says Sussman. “This makes the most sense because those are the most costly debts.”

While it may take longer to pay off your initial debt, a debt avalanche reduces your balances faster and costs you less in interest.

Debt consolidation

Debt consolidation is the process of combining several debts into one. Debt consolidation should lower your interest rate. It may also reduce your monthly payment.

Be very careful about selecting a debt consolidation loan, says  George Kamel, a personal finance expert with Franklin, Tennessee-headquartered Ramsey Solutions.

 "Debt consolidation offers a lower monthly payment because you will have an extended repayment term,” he explains. “However, a lower interest rate isn’t always guaranteed when you consolidate, and debt consolidation loans often come with fees for loan set up, balance transfer, closing costs, and more.”

In addition, debt consolidation does not resolve overspending habits. If you don't pare down your lifestyle, you can easily run up your credit card balances again and end up with more debt than before.

Credit counseling and debt management plans (DMPs)

Credit counseling typically involves seeking assistance from a nonprofit credit counseling agency. Credit counselors are usually certified and experienced in consumer credit, financial and debt counseling, and budgeting.

“Counselors meet with you to review your financial position and assist you in developing a specific plan to resolve your credit card debt issues,” continues Solomon. “They can give you advice on how to manage your money and credit cards, assist you in creating a budget, help you obtain a copy of your credit report and credit scores, and possibly provide instructional materials and workshops.”

Credit counseling agencies often offer debt management plans (DMPs) to help you resolve your debt. A DMP consolidates many credit card obligations into a single payment. Usually, your credit counselor can convince your credit card issuers to lower your interest rate and payment and help you get back on track.

DMPs usually have a three-to-five-year plan to resolve your debt. They typically require you to close your credit card accounts, which can lower your credit score temporarily.

“If you have difficulties repaying your credit card bills every month, a debt management plan from a nonprofit credit counseling agency may be the solution you are looking for. This has a lower impact on your credit score than debt settlement or bankruptcy because you completely return your original debt,” Solomon explains. 

Debt management plans are only effective if you can afford the monthly payment and have the discipline to see them through to the finish.

Debt relief (debt settlement)

Debt relief means negotiating a reduced debt payoff with your creditors.

“The debt settlement method is one of the most successful debt reduction choices for eradicating credit card bills. A debt settlement occurs when a creditor approves less than the whole amount owed as full payment. It also implies that debt collectors won’t be able to pursue you for the amount, and you won’t have to fear being sued for the debt,” says Solomon.

You can hire a debt settlement company and have them negotiate a lump-sum payment with your creditors for less than what you owe, per Kamel.

“That’s what they promise, anyway. Be aware that these companies charge a fee for their services, often somewhere between 20% to 25% of your debt,” Kamel warns.

Bankruptcy (Chapter 7 and Chapter 13)

As a last resort, you can explore filing for bankruptcy – either a Chapter 7 or Chapter 13. Bankruptcy is a public process that takes place in a formal court setting. The judge and a court trustee go over your income, assets, and liabilities. Only filers with low incomes qualify for Chapter 7 bankruptcy. Most have to file Chapter 13, which requires at least partial repayment of your debts, usually over five years.

“Almost every credit card debt is erased in a Chapter 7 bankruptcy. If you owe significantly more than you believe you can afford, Chapter 7 bankruptcy may be able to assist you in getting back on your feet,” Solomon notes.

Chapter 13 bankruptcy, on the other hand, allows you to reorganize your debts under the supervision of a federal court, with a three- to five-year repayment schedule. But you must maintain a consistent regular income to qualify, and your total unsecured debt cannot be more than $419,275 (other rules apply, too).

Don't Ignore Your Debt Problems

Too much debt can weigh you down. But realize that most Americans carry credit card debt, and many also have a problem paying it off. You are not alone, and there are solutions you can explore.

“Debt can seem absolutely crushing to so many people. But there is hope, there is a way out, and you can do this,” says Kamel. “If you stay motivated, get on a budget, and follow a good plan, you’ll see results and observe your debt begin to leave your life forever.”