While generally viewed in a negative light, debt has positive qualities that may benefit borrowers. Used responsibly, debt is a tool that allows users to make larger, necessary purchases. We have houses and apartments to live in, vehicles to bring us to work, and even education to help us achieve career success. In many instances, debt allows us to obtain things such as these.
When is Debt a Problem?
Debt becomes a problem for us when we use it irresponsibly. If we’re not careful with how we manage it, the balances that we carry may increase significantly due to interest. For those who would like to manage debt better, here are ways to know how much credit card debt is too much.
Your Debt-to-Income Ratio is High
A debt-to-income (DTI) ratio measures the amount of a person’s monthly debt payment against their monthly gross income. Lenders use DTI to determine the likelihood a prospective borrower will be able to manage their monthly payments and ultimately repay their debt. To calculate your DTI, take the sum of your monthly debt payments (credit cards, auto loans, student loans) and divide that figure by your monthly gross (pre-tax) income. Take the decimal amount you receive and multiply it by 100 to determine your DTI percentage.
Low DTI’s demonstrate a good balance between debt and income. If your DTI is higher than 43%, generally the highest amount a borrower can have while still qualifying for a mortgage, you may want to bring that percentage down. If your credit card balances constitute a significant amount of your DTI, you may have too much credit card debt.
You Have a High Credit Utilization Ratio
Having a high credit utilization ratio may be an indication that a person has too much credit card debt. A borrower’s credit utilization ratio is the percentage of the total available credit being used. This ratio is one of many factors considered by credit reporting agencies when determining a borrower’s credit score. Using too much of your available credit may signal to lenders that you have too much debt and may deter them from issuing more credit while the ratio is high.
You’re Only Making the Minimum Payment on Your Credit Card Balance Each Month
With factors such as interest, making only the minimum payments on your credit card may indicate that your payments are not reducing your debt. Making only the minimum payment may cover only a small amount of a credit card’s balance after interest and fees. Over time, minimum payments towards the balance of a credit card may have a borrower with a large amount of debt seemingly fighting to keep their head above water.
You’re Borrowing from Peter to Pay Paul
When you’re using one credit card to pay off another credit card, this may be a sign that you have too much credit card debt. Using a credit card to pay off another credit card’s balance may come in the form of a credit card balance transfer. Transferring a balance to a new account with a lower interest rate, while potentially making it easier to pay the balance off, may also impact a borrower’s credit score through the inquiries made by the lender.
Borrowers looking to transfer credit card balances to a newly-opened account must consider that they may not be approved by lenders if their DTI is high. Transferred balances also do not lower a borrower’s credit utilization ratio. Using a credit card to pay off another credit card may indicate that you have too much credit card debt.
You’ve Maxed Out Credit Cards
Hitting the spending limit on multiple credit cards may be a telltale sign that you have too much credit card debt. Maxed out credit cards may not only adversely impact your DTI and credit utilization ratio, the interest rates and compounding interest on the larger balances may make paying down the principal loan balance seemingly impossible. Borrowers with maxed out credit cards may also be charged fees for being over their credit card limits.
Your Credit Card Payments are Higher than All of Your Other Debt Payments
If all of your combined credit card payments are close to or higher than debt payments such as your auto loan or mortgage payments, you may have too much credit card debt. Borrowers carrying multiple large credit card balances may also be subject to fees and compounding interest charges, potentially increasing the principal amount owed on each card. If you find yourself paying large fees on multiple credit cards that already comprise a combined monthly payment that rivals your other debts, that may be a sign that you have too much credit card debt.