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While credit cards are useful for building a good credit history and convenient for making everyday purchases, if not monitored frequently, these convenient financial products can be a slippery slope to unwanted debt. There is no recommended maximum limit for credit card holders. The key to maintaining a good credit score is keeping credit utilization below 30% and paying off balances on time.
How much credit card debt is too high?
The “too much” indebtedness depends on the cardholder and his financial situation. According to a report According to consumer credit reporting agency Experian, the average consumer credit card debt in the third quarter of 2021 was $5,221. For some, that might be too much debt, but for others, it might be their average monthly spend on a credit card.
At first glance, zero debt sounds much better than having no debt at all. Debt, after all, indicates an obligation, and freedom often equates to a lack of obligation. Unfortunately, our system does not work that way.
For credit purposes, it can be beneficial to have at least a small, regular revolving balance so that issuers and lenders can see responsible credit card activity. In other words: To prove your financial responsibility for your loans and debts. Fortunately, due to credit card grace periods, you can run a balance without ever paying interest. Without any credit history or showing balances with responsible payment behavior, it can signal to lenders that you are too risky to lend money.
How can I maintain manageable debt?
The use of credit remains a key factor in the calculation of the credit score. A credit utilization ratio is the amount of credit used relative to the total amount of credit a cardholder has on all credit accounts. It is generally recommended that cardholders keep credit utilization below 30%.
Calculating credit usage is quite simple: add the credit limits of all the credit cards you have to find a total credit limit. Then add up the balances of all your credit cards and compare the two numbers. If your total balance is more than 30% of the total credit limit, you may be in too much debt.
Some experts consider it best to keep credit utilization between 1% and 10%, while anything between 11% and 30% is generally considered good. Card issuers and lenders want to see a cardholder use revolving credit and pay off balances responsibly.
Cardholders who don’t use their card report nothing to the issuer unless they pay an annual fee, but cardholders who overuse their credit limit are considered to pose more risk. Having at least a little debt can actually increase your credit score over time as long as credit activity is considered healthy, meaning payments are made on time, balances are kept low, etc.)
How to pay off credit card debt
When credit card debt seems out of control and high interest rates loom, options exist to help reduce credit usage and manage debt more responsibly.
Pay off credit card balances
If cardholders have sufficient funds, the fastest way to reduce their debt is to pay off all credit card balances as soon as possible. Obviously, this requires cash and is not always possible. Budgeting to pay off balances over time can help, even if interest starts to accrue.
There are other options if a cardholder needs more time to pay off their debt:
Apply for a personal loan
Personal loans are a cheaper option for cardholders who need more time to pay off their debts. Personal loans can offer much lower interest rates than credit cards. According Federal Reserve Data, the average credit card interest rate in February 2022 was 16.17%, while the average personal loan interest rate on a 24-month loan was 9.41%. An interest rate of 9.41% is still not low, but better than paying a double digit rate on a credit card. You can use our loan calculator to estimate various interest rate and repayment scenarios.
Loan applicants without excellent credit can ask a friend or family member with excellent credit to act as a co-signer, which could further reduce the loan applicant’s interest rate. This allows the cardholder to consolidate more credit card debt into one personal loan to be repaid over time.
Taking out mortgages, second mortgages or using a home equity loan against properties you own may also involve even lower interest rates, if possible.
Remember to practice responsible credit card spending after consolidating debt into a personal loan or any other loan of any kind.
Request a balance transfer
Some credit cards offer promotional introductory APRs of 0% on balance transfers for new customers. Cardholders with too much credit card debt can consolidate the debt onto a new card.
Balance transfers have limits. A new cardholder can only transfer up to the new card’s credit limit and balance transfers generally require a one-time fee for each transfer, which will increase the amount owed. If cardholders hope to consolidate multiple debts, each transfer will incur a fee.
Cardholders should keep in mind that interest will begin to accrue at the end of the promotional period if the balance is not repaid. The minimum payment determined by the card issuer is often not enough to repay the transferred balance.
Before requesting a promotional balance transfer offer, calculate how much it would take to pay off the balance before the end of the promotional period. Divide the total balance by the number of months included in the promotion (eg 12 months). The answer is how much the cardholder would have to pay each month if they hoped to fully pay off the balance during the 0% APR introductory period and avoid interest.
There is no magic number for too much credit card debt. Every cardholder should be aware of balances and spending habits to avoid falling into a cycle of debt. If a cardholder’s credit utilization rate is above 30% or if they are earning interest by not paying off balances, the debt may be too high. Anything unmanageable is too much, and if you feel like it’s getting hard to keep up with payments or make progress on paying off your debts, you’ve probably found your limit.
Consider making a budget to help you pay down your balances or applying for a personal loan or balance transfer card to help start a debt repayment plan.