Having a high credit card balance can be stressful and make it difficult to manage your finances. But what balance is considered too high, and when should you take action to pay it down? Here’s a look at guidelines for assessing if your credit card debt is getting out of hand.
How much credit card debt is too much?
There’s no single threshold for determining when credit card debt becomes excessive, since everyone’s financial situation is different. However, experts often recommend keeping your credit utilization ratio below 30%. This ratio looks at how much of your total available credit you’re using.
For example, if you have $10,000 in total credit limits across all your cards and $3,000 in balances, your credit utilization is 30%. If your ratio starts creeping higher than 30%, it’s time to reassess your spending and pay down balances.
Watch out once your minimum payments exceed 10% of income
Financial advisors caution against letting your monthly minimum credit card payments exceed 10% of your take-home pay. If you’re dedicating this much of your income just to keep up with minimums, you’re likely taking on more debt than you can realistically afford to repay.
How lenders view high balances
From a lender’s perspective, a very high card balance is anything over 50% of your credit limit. Maxing out cards can negatively impact your credit scores and make you look like a risky borrower.
Lenders may also view balances over 30% of your income as excessive, because it could be a sign you’re overextended. Debt exceeding 50% of income is typically considered quite problematic.
Watch for these red flags
Here are some warning signs that your credit card debt may be reaching unsustainable levels:
- Only making minimum payments each month
- Using cards for essential living expenses like groceries and utilities
- Taking out cash advances or using cards for non-emergency medical expenses
- Transferring balances between cards to avoid maxing out limits
- Disregarding due dates and frequently making late payments
- Exceeding 30% credit utilization month after month
How high balances impact your finances
Carrying excessive card debt can negatively affect several aspects of your financial situation:
- Savings – High interest payments make it harder to save money.
- Investing – Less ability to invest for retirement and other goals.
- Emergencies – Minimal cash reserves to cover unexpected expenses.
- Other loans – More difficulty qualifying for a mortgage, auto loan, etc.
- Interest rates – Reduced credit scores lead to higher interest on all borrowing.
- Stress – Financial anxiety and strained relationships.
How to tell if your debt load is manageable
Consider these factors when deciding if your credit card debt is at a healthy level:
- Your debt-to-income ratio – Total monthly debt payments divided by gross monthly income.
- Capacity to pay more than minimums each month.
- Having an emergency fund covering 3-6 months of expenses.
- Ability to pay all bills on time each month.
- Debt not preventing you from saving for retirement and other goals.
- Comfort discussing your debt and finances openly with family.
If you struggle with some of these points, it could be time to re-evaluate your spending and credit card balances.
Tips for handling high credit card debt
Here are some strategies if you find yourself carrying excessive balances:
- Pay more than the minimums each month to pay down principal faster.
- Consolidate multiple balances onto a 0% APR balance transfer card.
- Consider debt management services or credit counseling assistance.
- Look for ways to slash expenses and free up cash to put toward balances.
- Avoid new credit inquiries until your utilization is lower.
- Ask issuers for lower interest rates or waived fees.
- Draw on other assets to wipe balances out completely.
The bottom line
High credit card balances are largely relative to your individual financial situation. But utilizing more than 30% of your available credit or allocating over 10% of income to minimum payments are often signs that debt is becoming unmanageable.
The negative impacts of excessive debt can be far-reaching. By monitoring warning signs, you can catch problems early and take corrective action through careful budgeting and paying down balances. Seeking help through credit counseling is another smart step if you’re struggling with high interest payments and debt overload.