How Much Credit Card Debt Is Too Much?

Credit card debt is the money owed when you use a credit card and don’t pay off the full balance by the due date. This debt can quickly accumulate due to high interest rates, which are often much higher than other types of loans. For example, the average annual percentage rate (APR) [link] on credit cards can reach 30%.

Unpaid balances accrue monthly interest, increasing the total debt, especially if only minimum payments are made. Managing credit card debt requires consistent effort to minimize these costs.

What's a Normal Amount of Credit Card Debt?

There is no “normal” amount of credit card debt, as it varies by individual financial circumstances. For perspective, the average American household has about $7,951 in credit card debt, according to the New York Federal Reserve. However, what's manageable for one person might be overwhelming for another.

Here's a breakdown of average credit card debt by age group for 2023 to give you better insight:

Age Group	Average Credit Card Debt
Generation Z (18-26)	$3,262
Millennials (27-42)	$6,521
Generation X (43-58)	$9,123
Baby boomers (59-77)	$6,642
Silent Generation (78+)	$3,412

Table 1: Average credit card debt by age group (Source: Experian)

There is also a tendency to view all debt negatively. Still, well-planned debt can be a valuable tool for achieving financial goals like pursuing higher education or purchasing a home. In other words, normal debt and credit card debt are extremely subjective, which is why you should always take a look at your own financial situation. Use the Credit Utilization Ratio, Debt-to-Income Ratio, or Credit Card Debt Ratio to help you identify your credit card debt load.

What Are Signs of Excessive Credit Card Debt?

Signs of excessive credit card debt are when you owe so much that it starts to hurt your financial health. This problem can appear in different ways, from struggling with minimum payments and purchasing basic needs items to having a low credit score. It's really important to know when your credit card debt is too high in order to keep your finances stable and avoid bigger money issues later.

1. Minimum Payments Only: If you're consistently paying only the minimum amount, interest charges will continue to grow, making it harder to reduce the original balance. High interest rates often lead to a cycle of rising costs and debt.
2. Difficulty Covering Basic Needs: Another sign is if your credit card payments are making it hard to handle your other needs. If you're spending a lot of your income on your credit cards, you might struggle to pay for basic things or save money for the future.
3. Low Credit Score: Too much credit card debt can also lower your credit score. Using a lot of your credit limit can drop your score, which affects your ability to get good deals on loans or other credit lines in the future. This could mean higher costs when borrowing money or even getting turned down for credit.

It's important to notice these signs and take action to manage and reduce your credit card debt. Setting personal spending limits, familiarizing yourself with the ins and outs of debt relief, and using tools like the debt-to-income ratio or credit utilization rate below can help you keep track of your credit use.

2 Key Ratios to Help You Understand Debt

Credit utilization ratio and debt-to-income ratio are 2 key ratios to help you understand your debt and financial situation. Even if you're financially stable, knowing these ratios is crucial. They help you understand and prevent credit card debt.

Credit Utilization Ratio

Credit Utilization Ratio shows how much of your available credit you’re using. You find it by dividing what you owe on your credit cards by your total credit limit. It's best to keep this number under 30%.

For instance, if you can spend a total of $10,000 on all your cards, and you owe $3,000, your ratio is 30%. Even if your credit card usage isn't hurting your finances, you may still want to look at your spending if you're maxing out credit cards.

Debt-to-Income Ratio (DTI)

Debt-to-income Ratio (DTI) compares your monthly debt payments to your income. A DTI of 35% or less is considered good. Higher percentages suggest the need for better debt management. This ratio considers all debts, not just credit cards.

[insert DTI calculator]

How to Manage and Lower Your Credit Card Debt?

To manage and lower your credit card debt, you need a clear plan and some discipline. Here are some helpful steps:

• Organize Your Debt Information: First, write down all your credit cards, the amounts you owe, and the interest rates. This will show you which debts should be paid off first, based on their interest rates and the amount you owe.
• Use Balance Transfer Credit Cards: If your credit score is good enough, you can transfer your existing balances to a credit card with a 0% intro APR. This lets you pay the balance without adding extra interest.
• Choose a Payment Method:

1. Debt Avalanche: Focus on paying off the card with the highest interest rate first, while still making the minimum payments on your other cards. By focusing on the most expensive debt first, you end up paying less in interest overall, which helps you reduce the total amount owed.
2. Debt Snowball: Start by paying off the card with the smallest balance first, while making minimum payments on the others. This gives you quick wins by getting rid of smaller debts first, which can encourage you to keep going and tackle bigger ones.

• Consider Debt Consolidation [link]: It can lower your interest and simplify payments. Debt consolidation combines all your credit card debts into one loan with a lower rate. You can do this through a balance transfer card or a personal consolidation loan, depending on your credit score and overall financial situation. At One Payment Plan, we can help you connect with expert partners who can set up the right debt consolidation program for you. [link to partner]
• Seek Credit Counseling: Talking to a certified credit counselor can give you advice that's specific to your financial needs. They can help you understand your options, like a debt management plan (DMP), which combines your debts into one payment with a lower interest rate.

How to Avoid Too Much Debt?

You can avoid too much debt by being proactive and careful with your money. As always, you should try to find the solutions that fit your situation specifically. Here are some key tips to help you stay away from big debt.

• Grow Your Income: As things get more expensive, it's important to make sure your income grows too. Try to increase your earnings each year by moving up in your career, learning new skills, or even switching job fields if needed. Earning more can help you handle your expenses better without having to rely on credit cards.
• Start an Emergency Fund: Start an emergency fund by saving a small amount, like $25 from each paycheck, into a special savings account. As your finances get better, save more. This fund will act like a safety net, so you won't need to use credit cards during tough times.
• Make Big Cuts: Consider reducing your biggest expenses. You might move to a smaller house or sell your car if you can use public transport. Cutting down on these big costs can free up money for other important needs or add to your savings.
• Loud Budgeting: Be open about your budget by telling your friends and family about your spending limits. This method, known as “loud budgeting,” [link] helps you stick to your budget and resist spending too much when you're out with others. It's a great way to keep on track with your financial goals.