How much credit card debt is too much? Here's what experts say
Americans collectively owed $1.14 trillion in credit card debt as of the second quarter of 2024, according to the Federal Reserve. This is up 5.8% year-over-year and reflects a $27 billion increase from the previous quarter.
While many Americans made progress in paying down their debt during the pandemic, surging inflation helped reverse this positive trend in recent years, leaving millions relying on their cards to cover the basics and resulting in a sharp increase in defaults, with delinquency rates in 2023 coming in two percentage points higher than in 2019.
This problem is unfortunately compounded by high-interest costs. Credit expert John Ulzheimer, formerly of FICO and Equifax, explains that rates have soared from around 16% to 17% during the pandemic to around 24% today as the Federal Funds Rate has increased. With rising rates come higher monthly payments and increased difficulty paying down balances.
While there are options out there for debt relief, including debt consolidation or working with a debt relief company, the best choice for consumers is not to get in over their heads in the first place. But, how can you know if your charges are out of control? Below, we'll detail how to tell if you're in danger of getting into too much credit card debt.
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How much credit card debt is too much?
While each user's financial situation is different, there are some ways to determine if your debt is too high. Specifically, consider your answers to the following questions:
Is your credit impacting your financial health?
There's one obvious red flag that immediately suggests you have a problem.
"Credit card debt becomes too much when it negatively impacts your financial health," warns Douglas A Boneparth, a Certified Financial Planner, financial advisor and president of Bone Fide Wealth, LLC. "When credit card payments begin to hinder other financial goals—such as saving for emergencies, retirement, or major purchases—this can be a sign that debt may be excessive."
Boneparth explained that carrying large balances can both damage your credit score and cause you to experience financial stress. If you're worried about your debt, or find that you're devoting so much of your money to paying it that you can't accomplish other things, it's time to cut back -- despite the benefits cards can offer. "It's essential to strike a balance between the flexibility credit provides and the need to maintain long-term financial stability," Boneparth said.
So, how much is too much?
"It's a good rule of thumb that your monthly minimum payments aren't more than 10 percent of your monthly net income," advised Domenick D'Andrea, AIF, CRC, CPFA, financial advisor, and Co-Founder of DanDarah Wealth Management.
Bonepath also advised keeping total household debts below 36% of income, with no more than around 10% to 15% of this allocated to credit card debt. Any more than this amount and you'd likely find it challenging to meet today's needs and save for tomorrow.
If your credit card debt currently exceeds these amounts then you may benefit from the help a debt relief provider can offer.
Are you paying only the minimum?
Credit cards typically have low monthly minimum payments, but that doesn't mean that they're affordable just because you can cover that amount.
"If you can only make your minimum payments that is a sign that you could have too much credit card debt," D'Andrea warns. "If you're only paying the minimum, it will take decades to get out of debt."
In fact, if you owe $5,000 on a card with a 22% interest rate and a minimum payment that covers interest plus 1% of the balance, you'd be repaying your debt for 281 months and would incur $8,526.51 in interest costs over that time.
That's why Ulzheimer recommends paying your balance in full each month, especially with today's high rates.
While this isn't always realistic for everyone, not being able to pay above the minimum is a major red flag that suggests your cards will cause you long-term financial problems. Most people can't afford to lose thousands to creditors year-over-year without jeopardizing their ability to grow their net worth.
Are you hurting your credit score?
Finally, it's worth considering the impact your credit card debt has on your credit record.
Credit cards can help your credit score, or hurt it, depending on how you're using them. If you charge too much, they'll have a negative impact. This can make other, larger debts like a mortgage cost more. If you find yourself facing this situation, this is another major red flag.
"It's recommended that you keep your credit utilization below 30%," Boneparth explained. Credit utilization is calculated by dividing the total amount of credit you have used by the total line of credit available to you.
If your credit limit was $5,000 and you were using more than $1,500 of your credit limit, you'd exceed this ratio and your score would start to suffer. Paying off debt should become a priority in this situation and you certainly shouldn't keep charging.
What if you have too much credit card debt?
If you spot any of the above signs, there's a good chance you have too much credit card debt.
D'Andrea suggests taking a close look at spending habits in these situations. "If you realize that you're overspending on wants, that's a great way to start cutting back on your monthly spending," he suggested. "If most of your spending is on needs, that's where you need to look at your overall budget." He advised getting help from a financial advisor in this situation, as more substantive changes may be needed to stop over-relying on your cards.
The good news is, there are options for those with large balances they're struggling with. For example, debt consolidation can save you thousands and significantly improve your finances, often without damaging your credit score if you take a new loan at a lower rate to repay costly credit card debt.
However, some methods of tackling credit problems aren't necessarily a good idea. The reality is that there are some debt relief companies that make false promises and put you at risk of damage to your credit. While some people may feel they need to explore all their debt relief solutions, there are red flags to watch out for, and dos and don'ts to be aware of, before deciding if any type of debt relief is worthwhile.
For many people, the best choice is simply to buckle down, make a payoff plan, and make sure not to over-rely on cards going forward by knowing the signs that you're getting in too deep.
Have more questions? Learn more about the best debt relief options online today.
