Credit card debt is nothing new for most Americans. In fact, the “vast majority” of adult Americans have at least one credit card in their wallets and borrowers across the United States owe credit card companies a combined total of more than $1 trillion according to the U.S. Government Accountability Office.
As you use your credit cards and your balances begin to grow, you may ask yourself, “how much debt is too much?” After all, you dont want to end up with more high interest credit card debt than you can comfortably afford to pay off. The answer to this question is an important one and it can help you avoid further digging yourself into a hole.
Credit card debt is very common in the United States. In fact, the average credit card debt per American adult is around $6,500. But just because it’s common, doesn’t necessarily mean it’s healthy. So what exactly is considered a “healthy” amount of credit card debt?
How Credit Card Debt Can Get Unhealthy
Let’s first look at how carrying credit card balances can become problematic. Here are some of the biggest issues:
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High Interest Rates: Credit cards tend to have much higher interest rates than other types of loans or lines of credit. The average credit card APR is close to 22%. If you’re carrying a balance, that high interest rate means your debt grows very quickly.
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Minimum Payments Credit card companies only require you to pay a minimum amount each month, often around 2-3% of your balance. When you only pay the minimum it takes much longer to pay off your balance leading to more interest paid.
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No Clear Payoff Timeline With credit card debt there is no set monthly payment or payoff date like you’d have with an installment loan. It’s up to you to pay it off which can be an open-ended and overwhelming situation.
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Credit Score Damage High credit card balances can negatively impact your credit scores, making it harder to qualify for loans or credit cards with good terms in the future
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Spiraling Balances: It’s easy for credit card balances to slowly but steadily increase over time, especially if you rely on cards for everyday spending. Before you know it, your debt can snowball out of control.
Signs Your Debt Level Is Becoming Unhealthy
Watch out for these signs that your credit card debt may be creeping up to an unhealthy amount:
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You’re only able to make the minimum monthly payments on your cards.
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Your cards have high credit utilization rates, say over 30%.
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You’ve needed to open new cards to transfer balances or get access to more credit.
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You struggle to pay other monthly bills because of large credit card payments.
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Your credit scores have started to decrease because of high balances.
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You have to use credit cards to pay for necessities like groceries and utility bills.
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Your debt feels like a heavy burden causing stress and anxiety.
What’s Considered a Healthy Amount of Debt?
So when does credit card debt cross the line from being manageable to unhealthy? Unfortunately there’s no simple formula or dollar amount that applies to everyone. A $10,000 balance might be reasonable for someone earning $150,000 annually but create a huge hardship for someone making $30,000 per year.
That said, a good general guideline is that your credit card debt should not exceed 10% of your annual gross income. This limit helps ensure your debt stays at a manageable level relative to your earnings. It also keeps your credit utilization in the optimal range of less than 10%.
Here are some other signs your credit card debt load is still healthy:
- You pay off your monthly statement balances in full each billing cycle.
- Your minimum payments are under 5% of your monthly take-home pay.
- You have a plan and timeline for getting out of debt within 6-12 months.
- Your credit scores are in good to excellent range (690+ on FICO scale).
- Your debt isn’t causing financial stress or preventing other spending goals.
How to Get Unhealthy Debt Back to a Healthy Level
If your current credit card debt looks unhealthy based on the above criteria, take action to get it back down to safer levels. Here are some tips:
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Make a Budget: Track your income and expenses so you can allocate as much money as possible towards credit card payments. Look for areas to reduce spending.
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Pay More Than Minimums: Commit to paying more than the minimum payment each month to pay off balances faster. Even a few extra dollars can make a difference.
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Consolidate Debt: Combine multiple balances into one through a balance transfer card or a personal loan with a lower interest rate. This simplifies payments.
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Try Debt Payoff Methods: Use strategies like the debt avalanche or debt snowball method to pay off cards methodically.
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Lower Interest Rates: Talk to your card issuers about reducing your interest rates. Or transfer balances to a card with a lower introductory APR.
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Consider Credit Counseling: Non-profit credit counseling agencies can offer debt management plans with negotiated lower interest rates.
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Increase Income: Bring in more money by asking for a raise, finding a side gig, or selling unused items. Use that cash towards your card payments.
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Limit Card Use: Reduce reliance on credit cards until your balances are paid down. Only use for essential purchases you can afford to pay off monthly.
The most important thing is to take a proactive approach. With focus and discipline, you can eliminate unhealthy credit card debt and achieve a balance you can more comfortably manage long-term. Don’t get discouraged if it takes some time. Stay positive and stick to your debt payoff plan.
Healthy Credit Card Habits to Adopt
Once you’ve paid down your balances to a healthy amount, adopting smart credit card habits can keep your debt from ballooning again. Try to:
- Pay your balances in full each month
- Use cards mainly for convenience and benefits, not financing purchases
- Put everyday purchases on rewards cards paid off monthly
- Have no more than 3-4 open credit cards at once
- Keep utilization under 10% on each card
- Set up automatic payments to avoid missed payments
- Review statements closely each billing cycle
- Increase credit limits only as needed to keep utilization low
- Avoid paying only minimum payments
- Have a plan for paying off large purchases over several months
The Bottom Line
There’s no magic number that determines whether your credit card debt is at healthy level. It depends on factors like your income, other debts and ability to make payments comfortably. As a general rule, if your debt causes undue financial stress or damages your credit, it’s become unhealthy. Take proactive steps to pay down your balances and adopt habits that prevent debt from creeping up again. With diligence and commitment, you can manage credit card debt in a way that builds your financial health rather than harming it.
What are the dangers of having too much credit card debt?
If you have too much credit card debt, you may feel trapped. “One of the most frustrating financial dilemmas is getting caught on the credit card balance hamster wheel,” says Brandon Robinson, president and founder of JBR Associates in Plano, Texas, which specializes in retirement income. “Youve worked up a balance, have been paying the minimum balance due each month and are nowhere near getting out of credit card debt. Its as if you are going around in circles.”
Some of the most significant dangers of credit card debt include:
- Credit score reductions: If you have too much credit card debt, it may be challenging to make your minimum payments. Unfortunately, missed payments usually have a negative impact on credit scores. Other aspects of having too much credit card debt like a high debt-to-income ratio or credit utilization ratio could also have a negative impact on your credit score.
- Borrowing challenges: As your debt rises, youll likely find it more and more difficult to borrow money. Thats especially true if you arent able to make your minimum payments on your current debts consistently.
- Judgements and garnishments: If you cant keep up with your credit card debts financially, you could face lawsuits and judgments. Should this be the case, your creditors may be able to garnish your wages.
- Bankruptcy: You could end up with no other effective way out of debt than bankruptcy. In most cases, bankruptcies have a detrimental impact on credit reports for several years.
How your credit card balance affects your minimum payment
Credit card companies typically calculate minimum payments as a percentage of your balance plus interest. So, your minimum payment likely grows as your balance grows. Heres an example of how your balance might affect your minimum payment on a credit card with a 20% interest rate (assuming minimum payments are calculated as 1% of the balance plus interest):
- $5,000 balance: $133.33 minimum payment
- $10,000 balance: $266.67 minimum payment
- $20,000 balance: $533.33 minimum payment
- $25,000 balance: $666.67 minimum payment
Pro Tip to Paying Off Credit Card Debt
FAQ
Is $20,000 in credit card debt a lot?
If you’re carrying a significant balance, like $20,000 in credit card debt, a rate like that could have even more of a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges compound, turning what could have been a manageable debt into a hefty financial burden.
How much credit card debt is okay?
But ideally you should never spend more than 10% of your take-home pay towards credit card debt. So, for example, if you take home $2,500 a month, you should never pay more than $250 a month towards your credit card bills.
Is $6000 credit card debt a lot?
The average American household has over $6,000 in credit card debt, which can be a challenging amount to manage. If you’re just making minimum payments, expect to stay in credit card debt for many years – about 25 years on $6,000, by our calculations.
Is $5,000 dollars a lot of credit card debt?
It depends a lot on your personal circumstances – for most people 5000 (assuming we’re talking $ or £ or similar) is a fair amount – especially if it’s revolving debt (ie you’re paying interest on it) – credit cards are usually a very expensive way to borrow money.