Credit card debt is nothing new for most Americans. In fact, the “vast majority” of adult Americans have at least one credit card in their wallets and borrowers across the United States owe credit card companies a combined total of more than $1 trillion according to the U. S. Government Accountability Office.
As you use your credit cards and your balances begin to grow, you may ask yourself, “how much debt is too much?” After all, you dont want to end up with more high interest credit card debt than you can comfortably afford to pay off. The answer to this question is an important one and it can help you avoid further digging yourself into a hole.
Many people in the US have credit card debt. In fact, most adults in the US have at least one credit card. It might not seem dangerous to carry a small balance from month to month, but if you’re not careful, even a small credit card debt can become a big problem. This article will talk about whether it’s okay to keep a small credit card balance and what you should remember if you do.
How Credit Card Debt Can Impact Your Finances
Carrying credit card debt, no matter how small, means you’ll pay interest charges every month. The average credit card interest rate is over 15%. Even a few hundred dollars in credit card debt can result in noticeable interest fees every month. Those small interest charges add up over time.
Credit card debt also impacts your credit utilization ratio – the percentage of your total available credit you’re using. Experts recommend keeping your credit utilization below 30%. The lower your ratio the better for your credit score. If you carry credit card balances even small ones, your credit utilization inches upwards.
Finally, credit card debt makes it more likely you’ll overspend. When you keep a balance, it appears you have more available credit than you really do. This debt psychology can lead to overspending and accruing even more credit card debt.
How Much Credit Card Debt is Too Much?
There is no clear line that shows when credit card debt becomes a problem. As a general rule, you should keep your credit card balances below 10% of your take-home pay. Let’s say you make $4,000 a month. Aim to keep your total credit card debt below $400.
However, any debt that you cannot reasonably pay off with your current income becomes concerning. If minimum payments exceed 10% of your monthly income, that signals you may have excessive debt.
Your comfort level with debt also comes into play. If carrying debt causes you stress or anxiety, then any amount could be too much for you.
Tips for Managing Small Balances Responsibly
If you do choose to maintain a small credit card balance, here are some tips to manage it responsibly:
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Make payments larger than the minimum due. This will keep balances from ballooning.
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Pay down extra when possible. Any windfalls should go towards credit card balances.
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Do not use cards with existing balances. Put new charges on a card you can pay in full.
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Check balances weekly. This helps avoid overspending and surprises.
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Have a payoff plan. Know exactly when you’ll have the balance fully paid.
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Split big purchases across multiple cards. This prevents individual balances from getting too high.
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Avoid cash advances. They start accruing interest immediately with no grace period.
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Ask for credit line increases. This keeps your utilization ratio lower.
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Set up automatic payments. Autopay helps prevent missed payments and interest charges.
Alternatives to Maintaining Balances
If you want to avoid credit card debt, here are some options to consider:
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Charge only what you can pay in full each month. This prevents interest fees entirely.
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Build an emergency fund. If you save money, you won’t have to use credit cards as a backup.
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Use a debit card instead. Debit transactions draw directly from your checking account.
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Pay with cash for discretionary purchases. Using paper money provides a psychological brake on spending.
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Look into personal loans for big expenses. You may qualify for better rates than credit cards offer.
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Ask family or friends to help out in a bind. Loans from loved ones likely have friendlier terms than credit cards.
The Bottom Line
Maintaining small, manageable credit card balances is generally okay. To avoid interest charges, it’s best to pay off balances in full whenever you can. Keep an eye on your balances and make a plan to pay them off quickly. If you ever feel like your debt is getting out of hand, pay it off right away or think about other ways to spend your money besides credit cards.
What are the dangers of having too much credit card debt?
If you have too much credit card debt, you may feel trapped. “One of the most frustrating financial dilemmas is getting caught on the credit card balance hamster wheel,” says Brandon Robinson, president and founder of JBR Associates in Plano, Texas, which specializes in retirement income. “Youve worked up a balance, have been paying the minimum balance due each month and are nowhere near getting out of credit card debt. Its as if you are going around in circles. “.
Some of the most significant dangers of credit card debt include:
- Credit score drops: It might be hard to make your minimum credit card payments if you have too much debt. Unfortunately, not making payments on time usually hurts credit scores. Having too much credit card debt could hurt your credit score in other ways, too, like if you have a high debt-to-income ratio or a high credit utilization ratio.
- Tough times for borrowing: It will probably get harder to borrow money as your debt grows. That’s especially true if you can’t consistently make the minimum payments on your debts.
- Judgements and garnishments: You could be sued and given a judgment if you can’t pay your credit card debts. If this happens, your creditors might be able to take money out of your paycheck.
- You might not be able to get out of debt any other way besides bankruptcy. Most of the time, bankruptcy hurts credit reports for a few years after the fact.
How much credit card debt is too much?
As a general rule, you shouldn’t put more than 10% of your gross income toward credit card debt. Then again, rules of thumb are rarely reliable in finance. Everyone has their own unique financial circumstances and the 10 percent rule may not work well for you.
For example, lets say you take home $4,000 per month. Lets also say you have a $2,000 mortgage payment, and a $500 car payment. On top of that, you have expenses like insurance, food and utilities that add up to $1,100 per month. So, your total bare necessities expenses before credit card debt payments are $3,600 per month. If you spend $400 on minimum credit card payments every month, you wont have anything left to cover other expenses or to save for your future. So, in this scenario, the 10% rule isnt feasible.
Instead, you should make sure your debt is affordable – whether that means you spend 10% or 1% of your income on minimum payments. That also means its important to understand how your balance affects your minimum payment.
Should I Move Credit Card Debt To A Personal Loan?
FAQ
Is a little credit card debt ok?
Quick Answer There isn’t a specific amount of credit card debt that’s considered too much. Instead, it depends on your individual financial situation and how you’re using your credit cards.
Should I leave a little debt on my credit card?
You may have heard that carrying a small balance will help your credit, but that’s a credit myth. According to the CFPB, it’s generally a good idea to pay off your credit card balance when you can, rather than carrying revolving debt.
How much debt is OK on a credit card?
The general rule of thumb is that you shouldn’t spend more than 10 percent of your take-home income on credit card debt. May 22, 2024.
Is it bad to pay off a credit card little by little?
If you want to avoid extra fees or interest, you should pay off your credit card balance in full by the due date. You can pay off your credit card balance, but there isn’t much benefit other than keeping an eye on your credit utilization, and it will lower the amount of money you have available.