How Much Credit Card Debt Is Too Much?

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How Much Credit Card Debt Do You Owe?

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Andrea Miller
Andrea Miller
January 29, 2019

You’ve been feeling overwhelmed by your credit card bills recently. If you are having trouble paying even the minimum balance, you probably have too much debt. How much credit card debt is excessive? Although the answer depends on your financial situation, certain factors can indicate whether you’re in danger of having a debt you’re unable to repay. September 2017 data from the Federal Reserve indicates that more than 77% of American families are in debt. While credit can be a lifesaver in emergencies and a smart financial tool when used effectively, it’s easy to get in over your head.

Signs You Have Excessive Credit Card Debt

  • If you have trouble thinking about your debt because you feel anxious or nervous, you probably already know that you need to find a way to pay off your credit card bills once and for all. Denial about the debt is a sure sign that it’s not a positive influence on your life or finances. You might not even know the exact amount of your balance, especially if you have more than one credit card account.  If you ignore calls from creditors regularly or mislead your partner family members about the amount of credit card debt you’re carrying, it’s time to face the music and seek help.
  • An inability to afford more than the minimum payment means you have too much credit card debt. This is especially true if you’re unable to make even the minimum payment on a consistent basis. Because you’re paying only the interest, you’re not lowering your principal balance. Meanwhile, the amount of debt continues to grow as you rack up more interest along with late fees, finance charges, and other costs.
  • You are spending more than you earn or have very little left in your budget after bills are paid. If you have trouble even going out for a movie or ordering a pizza, excessive debt is having a noticeable impact on your quality of life.
  • You don’t have any money saved. This is especially dangerous because when you don’t have an emergency fund, you are unable to deal with unexpected expenses like car repairs without accruing additional credit card debt.
  • Even though you’re making regular payments on your debt, the balance amount never seems to get any lower.
  • You are taking cash advances from your credit cards to pay everyday expenses like groceries.
  • You do not contribute to an employer-sponsored retirement plan because you cannot afford to do so.
  • You need to work overtime or even take on a second job to make the minimum payments on your debt.
  • You have reached the spending limit on at least one of your credit cards.
  • Every time you pay down part of your credit card balance, you make another purchase that drives it back up again.
  • You need to take a cash advance from another credit card or even a personal loan to pay the minimum payments on your credit card debt.
  • Your credit score is too low to qualify for “good” types of debt such as a mortgage (see below for more on good vs. bad debt).
  • You consistently make late payments and accrue significant late fees as a result.

Finding Your Debt-to-Income Ratio

The debt-to-income ratio is a simple calculation that can help determine whether your finances are healthy. In general, you should strive to keep all your debt payments at less than 40% of your income. This number does not include student loan debt or mortgage payments.

An online debt-to-income ratio calculator can give you a percentage in seconds. Simply enter the total balances on your credit card debt, along with those for any medical bills, payday loans, personal loans, unpaid liens and judgment, and tax debt. You’ll also enter your gross monthly income (before taxes).

How Much Credit Card Debt Is Too Much?

If your ratio is higher than 40%, your debt load puts you at high risk for serious financial problems, if you aren’t experiencing those already. You may want to consult with a credit counseling service about your options. Credit counseling services may also be beneficial if your debt load is higher than 15%.

Having a debt-to-income ratio of more than 43% when you account for both good and bad debt can impact your ability to get a mortgage and qualify for other types of financing, such as a small business or home improvement loan.

Good Debt vs. Bad Debt

Some debt advances your financial future because you’re using it to purchase something that appreciates. This debt includes a mortgage, student loans, and even some car loans. But good debt isn’t just about how it’s used. A good loan should also have a low fixed interest rate that won’t create costly surprises down the road. Some forms of good debt, like mortgages and student loans, even have tax-deductible interest.

On the flip side, bad debt is taken out for purchases that do not have ongoing value, such as restaurant meals, vacations, and clothes. High credit card interest rates mean that you’re paying much more over time for these discretionary items. Bad debt may also have a variable interest rate, which means it increases as your balance goes unpaid for months or even years.

Some types of debt are categorized as toxic, such as loans or credit cards with interest rates higher than 36%, with long terms that mean you are paying much more than an item is worth, or with collateral such as a car that you can’t afford to have repossessed. These are almost impossible to pay off and can have a disastrous impact on your credit and cash flow.

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By eliminating bad debt from your life and focusing on good debt, you’re laying the groundwork for a better financial future. If you feel like you just can’t get caught up on your credit card payments, Solvable can help. Answer a few basic questions to learn more about our debt relief programs provided by well-researched and respected companies. We can help you see the light at the end of the tunnel.

 

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