How Much Credit Card Debt is Too Much? Know the Warning Signs

If you’re worried about credit card debt, you’re not alone. The average American household has between $5,525 and $8,701 in credit card debt. With high interest rates and daily compounding that debt stacks up fast. It can create a serious financial problem.

How much credit card debt is too much? That depends on your personal situation, but there are signs that can indicate that your credit card debt is out of control. Let’s look at some of them.

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13 Warning Signs That You Have Too Much Credit Card Debt

There’s no fixed amount of credit card debt that’s too much. It depends on your financial situation, income, debt-to-income ratio, credit utilization and other factors, like how much you pay each month for housing, a vehicle or other miscellaneous expenses.

There are, however, warning signs that you’re getting in too deep.

If you’re worried about your credit card debt, these 13 issues should give you an idea of where you stand.

1. You’re Carrying a Balance

If you’re carrying a balance from month to month, you already have too much credit card debt. You may not be under immediate stress, but you’re paying money you don’t have to pay, and you don’t want to do that.

If you pay your balance in full by the end of the statement period you pay no interest at all on purchases. You’re getting an interest-free loan from the credit card company. That’s a good thing.

Carry a balance from month to month and you’re paying a high interest rate (the average APR for interest-bearing credit cards is 16.44% in the U.S.), compounded daily. That’s not a good thing.

2. You’re Juggling Bills

Do you find yourself sitting down with a stack of bills and trying to figure out which ones you need to pay right away and which ones you can push off for a while?
If that sounds familiar, you probably have some problems with debt and spending, or your income may not be high enough to cover your expenses. There’s a good chance that credit card debt is part of the problem. You need to sit down and figure out where your money goes each month.

3. You Have a Cash Flow Issue

Are you living paycheck-to-paycheck and constantly worrying about running short of money before your next payday rolls around? Are you living without a budget, or running over your budget so often that you might as well not have one?

Have you lost track of everyday expenses and find yourself regularly having to skip bills to make essential purchases like groceries?

That’s another sign that you have a spending and debt problem. Again, credit card debt is likely to be a contributor.

4. You’re Using Payday Loans or Cash Advance Apps to Stay Afloat

One of the surest signs of financial desperation is being backed into a corner where you feel your only option is a payday loan. These short-term loans are easy to get and seem like a solution, but they often lead straight into an unbreakable cycle of high-interest debt.

Cash advance apps are a more affordable solution, but if you’re regularly using them to cover you because you ran short of cash before payday there’s a serious problem in your financial life, and credit card debt is probably part of it.

5. You’re Unable to Save

Saving money is a core part of financial stability. Saving an emergency fund can give you a buffer and keep you from taking on high-interest debt when unexpected expenses hit. Additional savings can help you achieve financial goals.

If you can’t save money, there’s probably an imbalance between your income and your spending. You’ll need to sit down and figure out where your money is going. There’s a good chance that a big chunk of it will pay down credit card debt.

6. Your Credit Score is Low

Your credit score is a financial report card. It tells creditors what they need to know before lending to you, but it also tells you a great deal about the state of your finances. Oddly enough, your credit score doesn’t start out at zero. The minimum FICO score is around 300 points. Instead, you’ll have what’s known as “no credit.”

Credit card debt affects your credit score in two ways.

• Late payments: If you’re carrying a large amount of credit card debt it’s easy to miss a payment or pay late. This will cause an immediate drop in your credit score.
• Credit utilization ratio: This is the percentage of your credit card limit that you use. If you have significant credit card debt you may be using a high percentage of your limit. Using more than 30% can be a drag on your credit score.

The average American’s FICO score is 716. FICO classes any score below 660 as “fair”, and a score in that range will make loans and credit cards expensive or even unavailable. There are many places where you can learn your credit score for free.

If you have a low credit score you should get your credit reports to find out why. Be alert for credit card debt problems. And if you find any errors on your credit report, fix them.

7. You’re Missing Loan Payments

If you have an installment loan, like a mortgage, student loan, or car loan, you’ll have monthly payments to make. If you’re short of money you may be tempted to skip payments, hoping to catch up down the line.

Missing loan payments can have serious consequences. Your credit score will suffer. Your account could go to a collection agency, hammering your credit and creating problems for you. You could even be sued, or your car could be repossessed or your home foreclosed.

8. You’re Constantly Stressed Over Money

Money can be a source of significant stress. Many Americans are losing sleep while thinking of bills and debt payments and wondering how to make them. Many are concealing debts or other financial information from their partners.

Financial stress can have a serious impact on your quality of life and on your relationships. If you’re feeling serious financial stress, you need to act. Find out what’s causing the stress and do something about it!

9. You Have a High Debt-to-Income Ratio

Your debt-to-income ratio or DTI is the percentage of your monthly income that goes to debt payments. This is calculated using your minimum credit card payment, but if your credit card debt is large your minimum debt payment will increase and can contribute to a high DTI.

Lenders consider DTI an indicator of financial strength. They prefer to see a DTI under 36%.

How to Calculate Your Debt-to-Income Ratio

It’s a good idea to keep track of your DTI. Here’s how to find it.

Step 1

Make a list of all the debt payments you make in a month, including:

• Monthly rent or house payment
• Alimony or child support payments
• Student loans, car loans, and other monthly loan payments
• Credit card payments (use the minimum payment)
• Other debts

Add up the total monthly debt payment.

Step 2

Take the number you got from step one, and divide it by your gross monthly income (your income before taxes). The result is your debt-to-income ratio which will be in the form of a percentage.

For example, let’s say your gross monthly income is $4500 and your total monthly debt payment is $1800. 1800 divided by 4500 is .40, so your DTI is 40%.

If you have a low DTI lenders will see you as a low-risk customer and will be more likely to lend to you. A high DTI is a sign of risk.

Like your credit score, DTI isn’t just a way to get loans. It’s an indicator of your financial health. Even if you aren’t shopping for a loan, it’s a good idea to keep your DTI as far below that 36% level as possible. A high DTI means that you are carrying a dangerously high level of debt.

10. Your Credit Cards Are Maxed Out

If your balance is at or near your credit limit, your card is maxed out. You can no longer make charges or draw cash advances on the card. Your minimum monthly payment has increased substantially and your balance is accumulating substantial amounts of interest.

This is a dangerous and expensive situation. Your credit utilization ratio at this point is approaching 100%, and that will damage your credit score. Payments get harder to make, and if you miss one, you will hammer your credit, incur expensive late fees, and probably trigger an even higher penalty interest rate.

If your credit cards are maxed out, you need to take action at once.

11. You’re Paying Credit Card Bills With Your Other Credit Cards

Borrowing to pay off debt is always a sign of trouble. If you’re pulling from one credit card to pay off another, you’re in a cycle that almost always leads to bigger financial problems. If you’re overspending on one card because you’ve maxed out another and you need to charge basic daily necessities in order to have enough money to make your minimum payment, you’re in the same place.

Using new debt to pay off old debt is a dead-end road. You’ll need to take action at once to get your finances under control.

12. You’re Trying to Open New Credit Cards to Pay Other Credit Card Bills

You have no remaining available credit so your cards are maxed out, you’re having trouble making the payments, and you’re running out of cash every month. What’s the solution? One thing that definitely isn’t the solution is getting another credit card. The hard inquiry will knock your credit back, and you’ll soon be stacking up another balance that will drain your income even more.

While applying for a balance transfer credit card can be a good way to consolidate debt — as we’ll explain later — it’s not a good idea to take on any new line of credit unless you already have a strategy in place to use the new credit for debt consolidation. Otherwise opening a new line of credit to cover the debts you already have will end up making matters worse. Plus if your payment history is already questionable, you probably won’t be approved for a new account.

13. You Spend More on Credit Card Payments Than You Do on Housing

Housing, whether rent or mortgage payments, is usually the largest single item in a household budget. If your credit card bills are taking up more of your income than your monthly mortgage or rent payment, you have too much credit card debt!

Do Credit Card Companies Forgive Debt?

Credit card companies are in business to make money, and they make money by collecting debts, interest, and fees, not by forgiving them. There is very little chance of getting outright forgiveness from a credit card issuer.

Some issuers do have hardship programs designed to help people who are under financial stress due to job loss, medical issues, or other problems outside their control. These programs usually provide easier payment terms, not outright forgiveness. They are often not advertised, so you’ll have to contact your issuer and ask.

You still have some options for escaping the credit card debt trap.

READ MORE: What you need to know about credit card debt forgiveness

Debt Management Plans

Nonprofit credit counseling agencies are a good place to look for help if your debt burden is out of control. Most services offer free initial sessions, where they analyze your debts and suggest possible courses of action. If your debt problems are severe they may recommend a debt management plan.

If you sign up for a debt management plan, you will make a single payment to the credit counseling service each month. The service will pay your creditors, saving you the burden of organizing your payments. The credit counseling service will also negotiate with your creditors for better payment terms and even debt reduction.

Debt management plans can be effective, but they aren’t easy. You may have to close credit accounts and cut spending, and it may take years to complete a plan. You will also pay a monthly fee to the counseling service.

READ MORE: How credit counseling works

Debt Settlement

Debt settlement is the process of negotiating to resolve a debt for less than what was originally owed.

If a credit card issuer can’t collect from you they will eventually sell your account to a collection agency. Collection agencies buy debts for an average of 4 cents for every dollar of debt they buy. If a creditor can get more from a settlement than they would from a collection agency they may consider settling your debt.

Settling debt has disadvantages. Your account will be closed and you’ll lose the card. The account will be marked settled on your credit report: Your credit score will suffer and potential creditors who pull your credit record will know what happened. Debt settlement is something to consider if your debts are unmanageable and the only other option is bankruptcy.

If you do decide to pursue debt settlement, calculate what you can actually afford to pay before you make an offer. Be honest with yourself: you will have to make the payment. Before committing, check out our top recommendations for legitimate debt settlement companies.

READ MORE: Is debt settlement the cheapest way to get out of debt?

Bankruptcy

If debt repayment is truly impossible, bankruptcy is an option you need to consider. A lot of people view bankruptcy as an admission of failure and a financial death sentence, but that’s not what it’s meant to be. It’s meant to provide a fresh start and a second chance.

Almost all individual bankruptcies fall into two types: Chapter 7 and Chapter 13. If you’re considering bankruptcy, it’s important to understand the difference.

Bankruptcy is not a free pass. It’s a legal process and it takes some effort. If you file for Chapter 13, you will be on a strict repayment plan for some time. If you file for Chapter 7, you could lose some assets. Either way, your bankruptcy will remain on your credit report for up to ten years.

That may not be as bad as it seems. Many Chapter 7 bankruptcy filers don’t lose any assets at all, and many people who are considering bankruptcy have already battered their credit scores beyond recognition. If you go into bankruptcy with a good credit score, you will see a substantial drop, but if your score is already poor, you’ll see much less damage.

Pro tip: Bankruptcy is a complex process and a difficult decision. If you’re considering it, talk to a bankruptcy lawyer or other financial expert. Most offer free initial consultations that will help you to decide whether it’s the right move for you. If you expect to be filing a simple Chapter 7 bankruptcy (the most common type) you could try Upsolve, a free app that walks you through the bankruptcy process.

READ MORE: Types of bankruptcy

Why Does My Credit Score Matter

Your credit score is a three-digit number that has an enormous impact on your life. With a good credit score, you’ll get the best deals and the lowest interest rates on loans and credit cards. Buying a house or a car will be significantly cheaper. As your credit score drops, you’ll be less likely to get approved and you’ll pay higher rates and fees.

Your credit score doesn’t just affect credit applications. Employers, landlords, and even auto insurance companies consider your credit score. A better credit score can open doors and cut costs.

Your credit score is based on your credit history — information that your creditors submit to three major credit bureaus: Experian, Equifax, and Trans-Union. That information is processed by credit scoring companies like FICO and VantageScore to generate your score.

You have several credit scores and credit reports. They may vary according to the specific scoring model used and the credit report used to generate your score. Some creditors don’t report to all three credit bureaus, so there may be differences in your credit reports.

You’ll understand your credit score better if you monitor your credit reports. You’re entitled to one free credit report a year from each of the three major credit bureaus. It’s a good idea to get those credit reports regularly, check them for errors, and use them to gain a better understanding of your financial situation.

Credit Card Debt Relief Options

Credit card debt can seem like an insurmountable problem, especially if you are juggling other debts at the same time. Don’t panic. There are proven strategies that can help you to manage your debts.

If you’re considering one of these strategies, remember that they will only work if you stop incurring new credit card debt. You’ll have to put your cards away until you’ve gotten your debts under control.

The Debt Snowball

The debt snowball strategy focuses on paying off your smallest debt first. Retiring a debt completely can give you the confidence you need to stay focused and keep carrying out your debt reduction strategy.

To use this strategy, make only minimum payments on all but your smallest debt. Put any available money you have into paying off that smallest debt. When it’s paid, give yourself a reward — you deserve it — and move on to the next smallest.

The Debt Avalanche

The debt snowball is based on the psychological benefits of actually retiring smaller debts. The debt avalanche focuses on financial efficiency.

To use the debt avalanche, list your debts and their interest rates or APRs. Focus on the debt with the highest interest rate first. Unless you have a payday loan, that will probably be your credit card debt. Make only minimum payments on all other debts and focus on paying that high-interest debt. When it’s paid, move on to the one with the next-highest rate.

Paying off your high-interest debt first can save you a substantial amount over the course of your debt reduction program.

Debt snowball or debt avalanche: Which is better? To learn more, check out this video:

Debt Consolidation

Credit card debt consolidation involves combining multiple debts into one. This usually means taking out a new credit line, using it to pay off several debts, and then paying off the new credit line.

Debt consolidation replaces several monthly payments with a single payment, which is easier to manage. You may also be able to get a consolidation loan at a lower interest rate, reducing your interest costs. Debt consolidation doesn’t make debts go away, it just makes them easier to manage and potentially cheaper.

Here are some ways to consolidate debt.

Personal Loan or Debt Consolidation Loan

Personal loans are a popular way to consolidate debt, and some personal loans are marketed specifically as debt consolidation loans. These loans may pay the proceeds directly to your original creditors, simplifying the process and removing the temptation to spend the loan money elsewhere.

A personal loan is an effective way to consolidate debt if your credit is still reasonably good. If your credit is already badly damaged you may not be able to get a personal loan at a low enough interest rate to make consolidation worthwhile.

READ MORE: Best personal loans

Balance Transfer Credit Cards

A balance transfer card can be an excellent tool for low-cost debt consolidation. These cards typically offer an extended zero-interest introductory promotion. This period may be from 15 to 21 months. You transfer balances from your other cards to the balance transfer card. If you can pay them off within the 0% APR period you’ll save a significant amount of money.

There are a few drawbacks: You’ll likely have to pay a balance transfer fee of 3% to 5% of the total amount you transfer, and you won’t usually qualify for cashback on balance transfers.

And you’ll have to be careful. If you make a late payment many cards will cancel the promotion and leave you paying the full interest rate. If you fail to pay off the balances within the promotional period you’ll be back to paying the full interest rate.

Most competitive balance transfer cards require good credit, so this is another method that works best if your credit is in reasonably good shape.

READ MORE: Best balance transfer credit cards

Home Equity Loans and Home Equity Lines of Credit

If you own a home and have equity in your home, you may be able to use a home equity loan or home equity line of credit (HELOC) to consolidate credit card debt. Your home equity is the current value of your home (not the amount you paid) minus the balance of your mortgage.

You can borrow against this equity. A home equity loan is a fixed sum, which works well for debt consolidation. A HELOC is a revolving credit line allowing multiple draws, which is also effective but may tempt you to overspend. These loans are secured by your home, so interest rates are typically low and approval is relatively easy.

Using your home as collateral for a debt consolidation loan gets you a low interest rate and relatively easy approval, but it’s also risky. If you can’t pay the loan you could lose your home.

READ MORE: How does a second mortgage work?

The Bottom Line

You don’t need $50,000 in credit card debt to be in severe financial trouble. Even what seems like an average amount of credit card debt can be too much for your financial situation. It’s easy to run up a credit card balance and fall into the trap of making minimum payments, allowing debts to multiply. Credit card debt carries high interest rates and compounds daily, making it easy for debts to escalate.

If you’re in the credit card debt trap, you need to act immediately to get out. If you’re headed toward the credit card debt trap you need to act immediately to stay out.

It is possible to get out of credit card debt. You may even be able to get out of credit card debt without paying it all, though your credit might suffer. The first step in that process is knowing how much credit card debt is too much and making a commitment to reduce those debts before they ruin your finances.

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