The average American household with credit card debt owes a total of $16,140, but the numbers don't tell the whole story. Some people can be overwhelmed with just a few thousand dollars of credit card debt, while others can comfortably handle a much larger debt load.
Here's how to tell if your credit card debt might be too much, and if so, what you can do about it.
The warning signs
Here are seven signs that could indicate your debt load is getting to be too much. Keep in mind that not all of these apply to everyone with credit card debt, and that just one or two of these may not be indicative of a problem.
- You've maxed out one or more credit cards. If you're using more than say, 70% of your available credit, it could be a sign of trouble. Continuing to spend could lead to over-limit fees, lots of interest, and no safety net if you actually need to use your cards for an emergency expense.
- You use your credit card for everything. Using your credit cards for small purchases you would normally make in cash can be a sign that you're overextended. Now, I'm not talking about charging small purchases in order to get rewards points or frequent flyer miles, and then paying your balance off. Rather, if you use credit for these small purchases because it's your only means of payment, it's usually no good.
- Your debt-to-income ratio is too high. While there is no set-in-stone rule, general lending practices give us some guidelines as to how much of your income should be used to pay down your debts. When applying for a mortgage, lenders generally want to see that your mortgage payment doesn't exceed 28% of your income, and that your total debt payments don't exceed 36%. This implies that about 8% of your income should be used to pay off your other debts. If your other debt payments (credit cards, auto loans, etc.) are substantially more than this amount, it could mean you're taking on too much debt. If you make $5,000 per month, your debt payments (excluding your mortgage or rent) should ideally be $400 or less. Of course, this is an ideal case, but a debt-to-income ratio of 20% or so should be an absolute maximum.
- You can only afford the minimum payments. Making the minimum payments on your credit cards can result in decades of debt, not to mention paying several times your original purchase amounts. For example, if you owe $15,000 at 18% interest, and your minimum payment is $250 per month, it will take you nearly 13 years to pay it off, and you'll end up paying a total of $38,500. Personally, I find that a good rule of thumb is to not charge so much that I couldn't pay it off within six months if I needed to. This means if I divide my credit card balances by six, I could potentially pay this much per month without much of a struggle.
- Using other credit to make your payments. If you're tapping into a line of credit, taking a cash advance from another credit card, or otherwise borrowing money just to make your credit card payments, it's a big red flag. This doesn't address the problem, and will only make your debt worse since you'll be paying yet another month of interest on the entire balance.
- Late or missed payments. If you're unable to make your payments by the due date, it's a sign of a serious problem. Not only will this make the problem worse by adding on late payment fees and potentially increasing your APR, but it can seriously damage your credit score for years to come. Mistakes happen, and one late payment every few years isn't going to kill your credit, but if lateness starts to become a pattern, it could cause you serious financial headaches down the road.
- Lying about your debt. Have you caught yourself lying about how much you owe in credit card debt to your family or friends? It's probably because you're embarrassed about how bad the problem has become, and you don't even want to admit the amount of money you owe to yourself, let alone other people.
Five possible solutions
If you feel like you're getting in over your head, there are a few actions you could take to try to fix the problem.
- Stop spending money. This sounds like the most obvious solution, and it is, but all of the other advice in the world won't help if you add to your credit card balances as fast as you're repaying them. Get on a budget, and limit or eliminate your credit card spending until the problem is under control. Only then can the real damage control begin.
- Get a lower rate. If you're having trouble making your payments, it's worth calling your credit card companies and asking them to lower your rate. They won't always say yes, but since it can save you lots of money in interest as well as reduce the amount of time it takes to pay your debt back, it's worth asking. In the example above, $15,000 would take nearly 13 years if you're paying back $250 per month at 18% interest. A 15% interest rate drops the repayment time to just over nine years, and you'll pay $10,500 less in interest.
- Consolidate. Another option is to consolidate your debt, either by getting a debt consolidation loan from a bank or peer-to-peer lender, or by taking advantage of a 0% balance transfer offer. Consolidation loans tend to have higher interest rates than, say, a mortgage or auto loan, but it's likely to be much better than credit card interest. An even better option might be finding a new credit card to transfer all of your existing balances to. For example, the Chase Slate card offers 0% interest on transferred balances for 15 months, and it has no balance transfer fee whatsoever. So, for the next 15 months, every dime you pay on your credit cards could go to reducing the principle -- not to interest.
- Then, pay more than you have to. Once you lower your interest rates or consolidate your debts, it's important to pay the debt aggressively. Even a small increase in your payment now can mean much less interest down the road. This is particularly important if you choose the 0% APR balance transfer route -- you should pay down as much as possible while the interest isn't running.
- Get on a repayment plan. If the above options would still result in a minimum monthly payment that is too much to handle, you may be able to work out a repayment plan with your creditors either on your own or through a credit counseling service. A great place to start is the National Foundation for Credit Counseling's website, which is a nonprofit organization that can help get your debt under control.
The bottom line
If your credit card debt has gotten out of control, it doesn't necessarily have to be a weight on your shoulders for years and years. There are several ways you can get it under control without damaging your credit, so make the choice to get started today.