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, most American adults have at least one credit card. While it may seem harmless to carry a small balance from month to month, even a little credit card debt can cause problems if you’re not careful. In this article, we’ll discuss whether it’s okay to maintain a small credit card balance and things to keep in mind if you do.
How Credit Card Debt Can Impact Your Finances
Carrying credit card debt, no matter how small, means you’ll pay interest charges every month. The average credit card interest rate is over 15%. Even a few hundred dollars in credit card debt can result in noticeable interest fees every month. Those small interest charges add up over time.
Credit card debt also impacts your credit utilization ratio – the percentage of your total available credit you’re using. Experts recommend keeping your credit utilization below 30%. The lower your ratio the better for your credit score. If you carry credit card balances even small ones, your credit utilization inches upwards.
Finally, credit card debt makes it more likely you’ll overspend. When you keep a balance, it appears you have more available credit than you really do. This debt psychology can lead to overspending and accruing even more credit card debt.
How Much Credit Card Debt is Too Much?
There’s no definitive threshold for when credit card debt becomes problematic. A general guideline is to keep credit card balances below 10% of your take-home pay. For example, if you take home $4,000 per month, aim to keep your total credit card debt under $400.
However, any debt that you cannot reasonably pay off with your current income becomes concerning. If minimum payments exceed 10% of your monthly income, that signals you may have excessive debt.
Your comfort level with debt also comes into play. If carrying debt causes you stress or anxiety, then any amount could be too much for you.
Tips for Managing Small Balances Responsibly
If you do choose to maintain a small credit card balance, here are some tips to manage it responsibly:
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Make payments larger than the minimum due. This will keep balances from ballooning.
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Pay down extra when possible. Any windfalls should go towards credit card balances.
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Do not use cards with existing balances. Put new charges on a card you can pay in full.
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Check balances weekly. This helps avoid overspending and surprises.
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Have a payoff plan. Know exactly when you’ll have the balance fully paid.
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Split big purchases across multiple cards. This prevents individual balances from getting too high.
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Avoid cash advances. They start accruing interest immediately with no grace period.
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Ask for credit line increases. This keeps your utilization ratio lower.
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Set up automatic payments. Autopay helps prevent missed payments and interest charges.
Alternatives to Maintaining Balances
If you want to avoid credit card debt, here are some options to consider:
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Charge only what you can pay in full each month. This prevents interest fees entirely.
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Build an emergency fund. Having cash reserves means you won’t need to use credit cards as a backup.
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Use a debit card instead. Debit transactions draw directly from your checking account.
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Pay with cash for discretionary purchases. Using paper money provides a psychological brake on spending.
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Look into personal loans for big expenses. You may qualify for better rates than credit cards offer.
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Ask family or friends to help out in a bind. Loans from loved ones likely have friendlier terms than credit cards.
The Bottom Line
Maintaining small, manageable credit card balances is generally okay. However, it’s wise to pay balances in full whenever possible to avoid interest charges. Keep a close eye on balances and have a plan to pay them off quickly. If debt ever feels out of control, take steps to pay it off immediately or consider alternatives to credit card spending.
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 much credit card debt is too much?
The general rule of thumb is that you shouldnt spend more than 10 percent of your take-home income on credit card debt. Then again, rules of thumb are rarely reliable in finance. Everyone has their own unique financial circumstances and the 10 percent rule may not work well for you.
For example, lets say you take home $4,000 per month. Lets also say you have a $2,000 mortgage payment, and a $500 car payment. On top of that, you have expenses like insurance, food and utilities that add up to $1,100 per month. So, your total bare necessities expenses before credit card debt payments are $3,600 per month. If you spend $400 on minimum credit card payments every month, you wont have anything left to cover other expenses or to save for your future. So, in this scenario, the 10% rule isnt feasible.
Instead, you should make sure your debt is affordable – whether that means you spend 10% or 1% of your income on minimum payments. That also means its important to understand how your balance affects your minimum payment.
Should I Move Credit Card Debt To A Personal Loan?
FAQ
Is a little credit card debt ok?
Quick Answer
There isn’t a specific amount of credit card debt that’s considered too much. Instead, it depends on your individual financial situation and how you’re using your credit cards.
Should I leave a little debt on my credit card?
You may have heard that carrying a small balance will help your credit, but that’s a credit myth. According to the CFPB, it’s generally a good idea to pay off your credit card balance when you can, rather than carrying revolving debt.
How much debt is OK on a credit card?
The general rule of thumb is that you shouldn’t spend more than 10 percent of your take-home income on credit card debt.May 22, 2024
Is it bad to pay off a credit card little by little?
You should pay your credit card statement balance in full by the due date to avoid additional interest or fees. While you can opt to pay your card’s current balance, there’s usually not much benefit outside of managing your credit utilization and will reduce your available funds.