Credit card debt is at an all-time high. The Federal Reserve reports total credit card debt is over $1 trillion in America, alone. It’s no wonder so many people are struggling to pay off their balances.
But, how much credit card debt is too much? Let’s explore that topic further.
How Credit Works
Before we talk about how much credit you should have, let’s talk about how it works.
Credit is money we borrow from a bank or lender. We use it to buy something with specific terms to pay it back over time. How much we can get is based on our credit score.
We can get a loan for a specific amount or a line of credit with a maximum limit. Credit cards work like the latter.
All forms of credit come with interest rates. This is the amount of money we are charged to borrow from the bank. It is a percentage of the amount we borrow.
We pay back the borrowed money each month. There is a minimum amount expected, but you can pay more if you want to pay it off faster.
Why Do You Need Credit Cards?
We need credit cards to help us build our credit score. If we use them responsibly, then our credit score looks great! This allows us to borrow for bigger items, such as a car or home.
What does responsible credit card use look like? Here’s a good list.
- One card with a reasonable credit limit
- Balance is only 30% of the credit limit
- Pay it off each month, if possible
- Used for needs, not wants
- Increases credit score
Using credit cards wisely is important for a healthy credit score. If you use them irresponsibly, it can keep you from owning property and assets in the future.
How Much Credit Card Debt Should You Carry?
The healthiest debt relationship builds your credit high. It also keeps your money in your wallet.
Keep only the credit you need for a healthy credit score. Have one credit card that you use for emergencies and necessities. Don’t increase or go over your credit limit.
You should adopt a ‘pay off as you go’ attitude toward your credit cards. Carrying a balance requires you to pay interest, and that costs you money.
It’s important to know how much credit card debt works for your income, too. You can use a debt-to-income ratio to keep your credit in perspective. Here’s how it works.
Debt-to-income ratio is a simple math problem:
Monthly Debt / Gross Monthly Income = Percentage of Debt Compared to Income
The percentage you get from that simple problem can tell you if you’ve got too much debt for your income level. Here’s how it measures up.
- Good: 15% and below
- Fair: 16% to 39%
- Poor: 40% and up
If you’re in the good range, your credit card debt is manageable. It’s still a good idea to work towards a ‘pay off as you go’ credit card debt scenario.
If you’re in the fair range, it’s time to look at paying off your debt. Look into some debt reduction methods. A good option is the debt snowball method.
If you’re in the poor range, seek credit counseling to get your credit under control. You may need to find some extra income to help you pay off your debt, too.
Are You In Too Deep?
You don’t need the debt-to-income ratio to know you’re in trouble, though. You can feel it in your wallet every month. There are some sure signs you’re too deep in debt.
Here’s a look at the most common signs.
Paying Minimum Payments Only
If you’re only paying your minimums, you’ve got a debt problem. Minimum payments will never help you pay off your credit cards. You need to pay more to make a dent in your credit card balances.
The truth is you’ll need a budget, first. Find out how much extra money you have left each month. Then decide how much you can pay toward your credit card balances.
You should pay as much as you can. You want to pay your balances off sooner than later. Carrying a balance is not ideal for your finances.
Low Credit Score
You should be looking at your credit score on a regular basis. Does your score look a little low? It might be because you have lots of credit cards with high balances.
Don’t worry, you can fix this problem. See if you can lower the credit limit on some of your cards. Reduce your balances as much as you can each month to improve your credit score.
Maxed Out Balances
Credit cards maxed out? Having trouble paying and keeping them down? You’ve got too much debt.
Try to figure out why you are using your credit cards. It’s best to stop using them, now. Put your credit cards away in a box or sealed envelope.
If you keep your credit cards maxed out, you are paying the max amount of interest, too. This is not healthy for your finances. Pay them down as much as you can every month.
You’re Paying Fees
Did you go over your limit or pay your bill late? You’ll be paying extra fees. Some of those fees are upwards of $35 – $50 a month!
Save yourself some cash. Make sure you pay your bill on time and keep your spending under the maximum credit limit.
Using Credit Because You Don’t Have Money
If you rely on your credit card to get you through the month, then you have too much debt for your income level. There are options to help get your debt under control.
Don’t forget that there are programs that can help. Check out the Federal Trade Commission for some advice on finding debt solutions.
Be careful, though. There are plenty of scams aimed at people in serious debt trouble.
Make A Debt Pay Off Plan, Now
Take the time to analyze your credit card debt. Does it look like you’re in too deep? Don’t sit and suffer!
Make a payoff plan and find your way back to financial freedom, today.