How Much Debt Is Too Much?

Are your monthly debt payments starting to take over your budget? When your credit card statements become one of your biggest concerns at the end of each month, it might be time to ask yourself whether you have too much debt. 

Credit card debt and other forms of consumer debt have become so commonplace in the last couple of decades that it can be difficult to determine exactly how much debt is too much. When everyone has it, how can you know when it is out of control? For example, American consumers have an average of three credit cards and an average balance of $5,525 as of 2021. 

There is no major issue with having a couple of credit cards with a small balance on each, but how can you tell when you’ve crossed the invisible line of too much debt? It is crucial to keep your eyes open for possible warning signs that your credit card debt has become problematic so that you can put a halt to your spending.

The quicker you are able to catch on to when your credit card debt has become too much debt, the easier it will be to reverse any damage and minimize your debt.

The Dangers of Credit Card Debt

Credit card debt can get out of hand surprisingly fast. Credit cards are a product that uses revolving credit to lend consumers money to make purchases. The problem with credit cards is that they can become incredibly easy to rely on for regular everyday spending as well as any unexpected expense that pops up.

Credit cards and personal loans for people with poor credit are high-interest debt which can make them incredibly difficult to pay off. The higher the interest rate on your debt, the quicker the balance will rise. This is especially an issue with credit cards and payday loans. Payday loans have such short loan terms that it can feel near impossible to pay off the balance plus the interest charges on the due date. With credit cards, an interest rate high enough can put you in a situation where your minimum payments have no impact on the card’s principal balance.

Problem debt has the potential to trap you in an endless cycle of debt that brings down your credit score, so it becomes impossible to qualify for more affordable lending products. It is for this reason that it is so important to know how much debt is too much debt so you can begin reducing it immediately. 

Warning Signs That You Have Too Much Debt

If you aren’t sure what you need to watch out for, it can be significantly more difficult to determine whether you have too much debt. It is not enough to simply compare your debt or money struggles to others, as so many people have too much credit card debt and are not even aware of it. A better strategy is to focus on yourself and notice red flags or warning signs that might indicate you are approaching problematic levels of debt.

Here are several signs to keep an eye out for that indicate your debt is too much:

Credit Utilization Ratio

Your credit utilization ratio being too high is one of the surest signs that your credit card debt is too much. The credit utilization ratio is how much total credit card debt you have compared to your overall credit limit on all your accounts. This ratio has a major impact on your credit report and can bring your score down if it is too high.

Most financial experts recommend a credit utilization ratio of 30% or below to keep your credit card debt in check. If you are spending nearly up to your credit limit on your credit cards, then your credit utilization is likely far higher than it should be. Not only will a high credit utilization ratio harm your credit score, but it will have the potential of making your debt payments unaffordable.  

Debt-to-Income Ratio

A good debt-to-income ratio is necessary to avoiding problem debt. Your debt-to-income ratio compares your total debt to your gross monthly income. If your gross monthly income is too low in comparison with your total debt, you have a debt-to-income ratio that may be warning you that you have way too much debt.

It might be necessary to do what you can to close the gap in your debt-to-income ratio by paying off your debt and increasing your income to prevent your debt payments from taking up a considerable portion of your gross income each month. 

Living Paycheck to Paycheck

A sure sign that your debt has taken over is when your credit card payments are so high that you are living paycheck to paycheck. When your monthly payments on your other debt are making it difficult to even afford your mortgage payments, you need to minimize your bad debt as soon as possible. 

A low debt-to-income ratio paired with high monthly debt obligations can make all other monthly expenses more challenging to budget. Suppose you find yourself needing to rely on credit cards and other high-interest debt like online payday loans to cover necessities. In that case, some serious changes need to be made to improve your financial situation.

You Are Unable To Save

If you consistently come to the end of the month with no money leftover after your monthly expenses, you likely are unable to do much saving. You are putting yourself in an endless cycle of debt when you have no savings to fall back on when unexpected expenses come up. Paying for every surprise expense by borrowing money leaves you with less money to save at the end of every month because of your credit card bills, and it repeats on and on, leaving you in an endless cycle of debt. 

Minimum Payments Don’t Bring Balances Down

The final sign of too much credit card debt might be the most frustrating of all. If you have credit card balances with a particularly high-interest rate, you might experience a phenomenon common for those with too much credit card debt, wherein your monthly payments only pay off the interest charges and not the actual balance.

When you can only afford to pay credit card companies the minimum payments, you may not actually be making any dent in your debt balance because the interest being accrued is higher than the monthly payment. This would drive anyone crazy as it feels like you are battling your debt, and the debt is winning. If this sounds familiar to you, it is time to pay off your debt and stop taking on new debt altogether.

How To Minimize Your Credit Card Debt

If you have come to the conclusion that you have too much debt, the best thing you can do for your financial health is to minimize it as much as possible. Tackling credit card debt can be an overwhelming task to confront especially if you are not sure how to get started. 

Here are a couple of tips to help you get on the right track to financial freedom:

Re-Evaluate Your Monthly Budget

The first thing that we recommend doing to begin minimizing your debt is to take some time to look over your monthly budget. Analyze how much of your monthly income is put towards necessities like groceries and monthly mortgage payments. Things like rent or mortgage debt are necessary expenses that can’t be eliminated from your budget. 

But once you set these aside, there should be plenty of unnecessary expenses left in your monthly budget that you may be able to minimize or get rid of all together. See what you can cut down on and redirect that cash to your monthly debt obligations.

Employ A Debt Repayment Strategy

If you are unsure how to approach your credit card debt or have trouble getting motivated, it might be a good idea to implement a debt repayment strategy to help yourself stay on track. Some popular debt repayment plans include the snowball method and the avalanche method.

Debt Snowball Method

With the debt snowball method, you start paying off your smallest balance first while making only minimum payments on the rest of your credit cards. Once the smallest debt has been paid off, you snowball that monthly payment onto the next smallest balance. This strategy keeps your motivation up by giving you wins, and each monthly payment adds onto the last as each balance is repaid in full.

Debt Avalanche Method

The debt avalanche method focuses less on motivation and more on saving money on interest. In the avalanche method, you pay off the balances with the highest interest rates first while making the minimum credit card payments on your other balances. After the first balance has been taken care of, you carry over the monthly payment to the balance with the next highest interest rate.

Consider a Debt Consolidation Loan

Something that might help you manage your total monthly debt are debt consolidation loans. If you have too many credit card payments to keep track of, a common solution is to use personal loans to pay off your debt, so you have one straightforward monthly payment. You might be able to access more competitive interest rates that could help you save money with a debt consolidation loan. It may be significantly easier to keep all of your debt in one place, so you don’t need to worry about missing a payment.