Assessing how much credit card debt is too much can be tricky. However, there are signs to look out for that you need to do something about your credit card use ASAP.
We’ll explain the most common indicators that you have too much credit card debt, what the consequences of having too much debt are, and what you can do to get out of debt and get back on your feet.
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Do I have too much credit card debt?
According to a 2021 Consumer Credit Card Market report, the average American had $5,000 in credit card debt as of 2020. 1
Having more debt than the average doesn’t necessarily mean you have too much debt. Likewise, having less debt than the average doesn’t mean you’re in good financial standing. The “safe” amount of debt depends on your individual financial situation.
To determine if your credit card debts have spun out of control, watch for these five signs that you have too much debt:
1. Your credit utilization rate is high
Your credit utilization shows how much of your credit you’re currently using. This number can affect up to 30% of your credit score, so it’s important to maintain a healthy credit utilization rate.
You can calculate utilization rate by dividing your current balance by your available credit. The lower this number is, the better.
Financial experts suggest you keep your credit utilization rate below 30%, with many experts advising you keep it much lower than that (below 10%, if possible). 2 If you regularly have a 30% or higher credit utilization rate, you may have too much credit card debt on your hands.
2. Your debt-to-income-ratio is high
Your debt-to-income ratio (DTI) indicates how much of your income goes toward paying off your debts each month. Your DTI is calculated by dividing your recurring monthly debt by your gross monthly income.
Your recurring monthly debts may include:
- Credit card bills
- Mortgage payments
- Rent
- Property taxes
- Car payments
- Student loans
- Personal loans
- Child support
- Alimony
- Store lines of credit
- Time-share payments
Having a high DTI suggests that you’re spending more than you can afford, and it can impact your ability to get a loan. Most lenders want to see a DTI below roughly 35% to loan you money. 3
If your minimum monthly credit card payments are contributing heavily to your DTI, you have too much credit card debt.
3. You’re maxing out your credit cards
Maxing out your credit cards month to month is a sure sign of poor spending habits. This is especially true if you’re maxing out cards and then leaving the balance unpaid to accumulate interest. If you have even one credit card that’s been maxed out for more than a month, you currently have too much credit card debt.
4. You drained your savings
Draining your savings to pay off your credit card debt deprives you of financial security. It’s important to have money saved to protect yourself and your family in the event of emergencies—most experts recommend saving enough to pay for 6 months of expenses.
If your financial cushion is gone because you had to dip into it to keep up with your credit card payments, you definitely have too much debt.
5. You don’t know how much you owe
Tracking your credit card spending is an essential part of financial maintenance, and lets you avoid getting in over your head financially.
If you aren’t sure how much you owe across your credit cards, then however much debt you have, it’s probably too much. You should stop using your cards at all until you take stock of your financial situation and figure out how much you owe.
How much debt do I have?
If you’re afraid you have too much credit card debt but you aren’t sure how much you owe, the first place to look is your credit report.
You’re entitled to a free copy of your credit report every 12 months from the three major credit bureaus (Experian, Equifax, and TransUnion) at AnnualCreditReport.com. Additionally, many credit card companies and banks offer free credit reports. Check your accounts to see if you qualify for any of these benefits.
Keep in mind that lenders aren’t required to report to the credit bureaus, although most major ones do. 5 Therefore, you may have to use other strategies to find out how much debt you have if you’re worried your credit report is missing information.
Here are some more ways you can find out how much debt you have:
- Compile your most recent bills
- Check your online banking accounts and online credit card accounts
- Call your creditors directly
Strategies like that will mainly be necessary if you have less-common types of debt, such as payday loans. All of your credit card debt will probably show up on your credit reports (although it’s not guaranteed).
Consequences of having too much credit card debt
Of course having too much credit card debt is bad for your finances. But the impact of debt goes far beyond owing a lot of money. Here are the consequences of having too much credit card debt:
Your debt will accumulate quickly
Credit cards have relatively high interest rates, which means that if you have a lot of credit card debt, you’ll accumulate high interest charges each month. Even worse, if you don’t pay your credit card each month, you may get hit with a penalty APR. Penalty APR is an even higher interest rate, and usually lasts a minimum of 6 months (or longer if you continue missing payments).
The more interest you accrue on your outstanding balances, the more your monthly payment will grow. As your payment grows, your interest charges will get even higher, and so on, in a vicious circle. Depending how bad or good your credit card APR is, this spiral could cost you hundreds or even thousands of dollars.
Credit card interest compounds daily (meaning the interest you owe gets calculated every day). 6 In other words, every single day you leave your credit card debt unpaid, the amount you owe increases.
Your credit score will drop
The two most important factors determining your credit score are your credit utilization rate and your payment history.
As we’ve said, the more of your available credit you’re using, the higher your credit utilization rate will be. The higher your utilization rate is, the more your credit score will suffer.
In addition, having a lot of credit card debt makes it easy to make late payments, which will damage your payment history and hurt your credit score.
You may have difficulties getting other loans and credit
If you have a high debt-to-income ratio, lenders are likely to consider you a risky borrower. As a result, you may struggle to qualify for lines of credit, including:
- Auto loans
- Home loans
- Mortgages
- Credit cards
For instance, in most cases, you need a 43% or lower DTI to get a qualified mortgage, which is more affordable than other mortgages due to its favorable terms. 7 8
Your account will go into collections
If you repeatedly fail to make payments on your debt, your creditor may send it to a debt collection agency.
As a result, your debt will show up on your credit report as a collection account, which will hurt your credit score. In fact, collections can still hurt your credit even after you pay them off.
If this happens, you’ll have to deal with the headache of removing collections from your credit report in addition to receiving calls and letters from debt collectors.
You risk losing your property
If you aren’t able to pay your credit card debt and you choose to ignore debt collectors or your creditor, they may file a lawsuit to collect what you owe them. If you respond to the lawsuit too slowly, don’t respond at all, or lose in court, you could end up with a judgment filed against you.
Judgments allow your creditor or collector to do any of the following: 9
- Garnish your wages (they have the right to take up to 25％ of every paycheck). 10
- Collect money from your bank account.
- Put a lien on your real property, such as your car or home (this allows them to repossess the property if you continue not to pay your debt).
- Put a lien on your personal property (creditors will likely only take this route if your personal property is worth a lot, as the process is fairly expensive).
How to get out of credit card debt
There are several ways to get out of credit card debt. Here are the five major steps you should take to recover:
1. Create a budget
Plan out how you’re going to repay your debts, what date you want to repay them by, and what expenses you can cut to help you reach your repayment goal. Keep your budget reasonable so that you’re more likely to stick to it.
One tip to save money is to use cash instead of credit cards for daily purchases. Studies have shown you may be less likely to overspend this way. 11 This has the added benefit of not allowing your credit card debt to accumulate even more.
2. Choose a payment method
One you have a repayment goal in mind, you need to decide the order that you want to tackle your debts in. There are two main methods of repaying debt:
- The avalanche method: This method targets debts with the highest interest rates to be paid off first. You can then use the money you save on interest to pay off your accounts with lower interest rates.
- The snowball method: This method prioritizes paying off the smallest debts first. Doing so can be more satisfying, as you’ll eliminate your debts faster than with the avalanche method. However, you’ll end up paying more money in interest in the long run.
3. Consolidate your debts
Debt consolidation combines multiple debts into a single debt with a lower interest rate. Like any other debt relief method, debt consolidation has its pros and cons. For example, consolidation debt can hurt your credit temporarily. However, when done right, it’s a good way to streamline your finances and save money, improving your credit and financial standing in the long run.
There are two ways to consolidate your credit card debts:
Perform a credit card balance transfer
A credit card balance transfer lets you move your debts from high-interest credit cards to one with a lower interest rate.
You can use an existing low-interest credit card (provided its credit limit is high enough to take on your debts), or you can get a special balance-transfer credit card.
A balance-transfer card typically offers 0% APR for 12 to 18 months. However, it usually has a balance transfer fee of 3% to 5% of the transferred amount, so run the numbers to make sure you’re actually saving money. 12
Get a debt consolidation loan
A debt consolidation loan is a type of installment loan, which is a lump sum of money you receive initially and pay back over time on a set schedule.
Similar to a balance transfer, you can move your debts from multiple credit cards to one single loan—just make sure that your new loan has a lower interest rate than your other debts. (Your odds are pretty good, since installment loans generally have lower interest rates than credit cards.)
Note that your lender may increase your interest rate over time, so be careful with this consolidation method if you’re unable to agree to a loan with a short term. 13
4. Lower your credit card APR
If a high interest rate on your credit card is making repaying your debts feel impossible, you can contact your lender and request a lower APR on your credit card. While this isn’t guaranteed to work, it’s worth a shot, as lenders may be more willing to help than you think.
5. Negotiate your debt down
Believe it or not, you can negotiate down your credit card debt with your card lender. Again, this tactic may not work for everyone, but it’s a risk-free option. Call your credit card issuer and ask about debt repayment plans and whether they’re willing to negotiate a lower balance or offer a deferred interest period. Remember that your credit card lender wants the debt paid back as well, so they may be more willing to work with you than you imagine.
