How Much Credit Card Debt Is Too Much?

Determining whether you have too much credit card debt varies depending on your individual circumstances. High debt load for one person may be manageable for another. However, there are signs that your debt load is out of control and too much debt often results in stress, financial hardship and lower credit scores. Evaluate your budget and calculate your debt-to-income ratio to determine potential problems.

Debt-to-Income Ratio

Excluding house payments, consumer debt beyond 20 percent of your net income may indicate financial problems, Bill Hampel, chief economist for the Credit Union National Association tells Bankrate.com. Hampel advises consumers to include second mortgages and equity loans in the mix when calculating debt load as the first mortgage is an investment that generally increases in value while subsequent secured loans are often used to repay other debts.

Credit Scores

Credit bureaus use credit-scoring models that factor your available credit to total debt ratio --- utilization ratio --- to determine your creditworthiness and credit score. Generally, the less you owe on a particular credit card and across all cards, the better your score. The Fair Isaac Corporation FICO, recommends keeping your credit card utilization ratio below 50 percent to minimize negative credit scoring. FICO also cautions against altering your utilization ratio by closing paid credit cards unless managing credit card debt is difficult and open cards increase the risk of overspending.

Warning Signs

If you're using credit cards to pay for day-to-day expenses due to lack of cash, making only the minimum monthly payments, have late payments, continue to charge on high interest rate cards regardless of fees or are at or near the limit on one or more cards, you may have too much credit card debt. Additionally, living paycheck to paycheck and lacking savings may indicate too much debt. If you have too much debt and find yourself struggling with payments, the Federal Trade Commission recommends realistic self-budgeting or credit counseling from reputable agencies.

Considerations

Consumers often use balance transfers to shift high balance or high-interest rate balances to low-interest rate cards. While this practice is beneficial when the goal is to pay off debt quickly and reduce fees, applying for numerous cards in a short period or amassing a lot of cards may deter lenders from approving loans or offering less favorable rates. Additionally, opening new credit cards without a budget or repayment plan may lead to increased debt and financial hardship.