Editorial Policy

How Much Credit Card Debt Is Too Much?

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By Eva Norlyk Smith, Ph.D.
July 17, 2009

More than half of Americans with credit cards carry a revolving balance, and the average American household is estimated to owe more than $11,000 in credit card debt. But how much credit card debt it too much? The answer is, it depends.

With other types of debt, there are fairly simple benchmarks for how much debt is too much: if you can’t meet the monthly loan payments and have to default on the debt, then you have too much debt. When it comes to credit card debt, however, the answer is not quite so simple. Many people assume that as long as they pay the minimum on their credit card bills each month everything is fine. Unfortunately, credit card debt affects you adversely in several ways, long before the debt load becomes so high that you can’t make the monthly payments.

Credit card debt is a slippery slope, and most people don’t realize they are in trouble, until it’s too late. Few financial instruments wield such power to get you in over your head within a short period of time.

Taking a page from Homeland Security’s Threat Alerts, we can say, metaphorically speaking, that credit card debt represents varying degrees of threats to your financial security, from barely noticeable to severe. Use our guide to the 5 Credit Card Debt Danger Levels, to determine to which degree credit card debt might be a threat to your long-term financial security.

The 5 Credit Card Debt Danger Levels

Code Green:
You are unable to pay off your credit balance in full each month. While occasionally taking out a short-term credit card loan is okay, carrying high interest credit card debt over the long term is very expensive. If you’re paying interest on your credit cards ranging from the typical 10.99% to 24.99%, your hard-earned money is lining someone else’s pockets. You’re better off recalibrating your expenses to find ways to cut back on your credit card debt.
Code Blue:
Your credit card debt exceeds 30% of the available credit limit on your account.

At this level, credit card debt becomes a greater source of concern, because it begins to pull down your credit score. It’s best to keep revolving balances below 10% of the credit limit. The closer your credit cards are to being maxed out, the more your credit score will drop. A low credit score, in turn, can have numerous negative spill-over effects in other areas of your finances.

Code Yellow:
You can only afford to pay the minimum due each month.

It may look like you’re managing your credit card debt just fine, because you’re paying the minimum due each month and never miss a payment. Unfortunately, paying just the minimum monthly payment on credit cards is very costly. It will keep you in debt and paying expensive interest charges for a long, long time. In fact, you can more than double your money by accelerating payments on your credit cards. Anything else is just throwing money out the window.

Code Orange:
You have to move money around and borrow from one card to pay another.

If you have to borrow from Peter to pay Paul, your credit card debt has reached a level where it poses a significant risk to your financial security. Borrowing comes in many forms. It may be as simple as having to choose between paying for basic necessities versus your credit card bills. Or, you may find yourself looking for additional sources of credit, be it another credit card, a home equity line of credit, or even borrowing against your retirement money. Stop fooling yourself thinking that things will get better. They won’t on their own. It’s time to explore ways to pay down your credit card debt.

Code Red:
You are behind on your credit card payments.

You have had to miss one or more of your credit card payments, and you are struggling to meet future payments. At this point, your credit card debt has tipped you over the edge and is posing a serious threat to your financial security. You’ve started down the slippery slope of deteriorating credit, which can lead to an avalanche of negative consequences. Rather than just ignoring the problem, consider seeking help. Your card issuer may be able to enroll you in a hardship program, or alternatively, a trustworthy Consumer Credit Counseling Service can help restructure your debt load to get your payments down to a level you can afford.