How much credit card debt is too much?

Want to play a quick game of would-you-rather? Okay, you go first. Would you rather a new acquaintance read your text messages or credit report?  If you’re like most people, you’d rather reveal the secrets buried in your message history than the ones on your credit history! 

But having credit card debt is nothing to be ashamed of — especially considering 75% of Americans carry a balance from month to month. Heck, it took me five years to navigate my way out of a $4k holiday shopping spree from my early 20s.  

But how much credit card debt is too much, and how do you dig yourself out of a debt hole once you start sinking into it? Hold off on charging more Amazon purchases to your credit card until you’ve read this. 

Why is it so easy (and tempting) to rack up long-term credit card debt? 

While people at any age may have difficulty resisting the urge to splurge, it’s not uncommon for young adults specifically to make a few spending missteps in their early 20s. So if you find yourself with a maxed-out credit card or two (or three, or…?), first know that tens of millions of people are in the same boat as you.  

Take my holiday shopping spree of 2014, for example.  

I had just accepted a brand new job making what, in my eyes, was an incredible salary (it wasn’t). And what do you know—my credit card company was so excited for me that it wanted to offer me a more extensive line of credit.  

Unfortunately for me, I enthusiastically accepted.  

Overnight, my credit line didn’t just double or triple. Instead, I woke up one morning to a 900% increase in my available credit. Granted, I didn’t start with much. But I had never had immediate access to that much money before, and like any impulsive twenty-something, I couldn’t wait to spend it.  

After all, I only had to pay 2% of my monthly balance, so why not? But, little did I know, just seeing that the minimum payment number would hugely influence how long I took to pay all that money back.  

Beware of anchoring bias

Scientists studied this phenomenon and dubbed it “anchoring bias.” The study found that simply suggesting a minimum payment reduces the amount people think they can pay. When credit card companies hid the minimum payment number, people increased their payments by 70 percent!  

Short of having mind-controlling superpowers, credit card companies have been slowly committing psychological warfare on their consumers to convince us to stay in debt for longer than we need to. It wasn’t until I started thinking about buying a house that I realized carrying all that debt was holding me back from achieving the next big step in my life.  

How much credit card debt should you carry from month to month? 

If you carry a large balance from month to month, you may have charged more on your card than you can afford to pay back immediately. It’s a tempting move when you’re pinched for cash—especially with such enticingly low monthly payments! 

Some say you’re in trouble once you hit over $5,000 in credit card debt. Others say that if your interest payments are more than 10% of your income, you’ve got a problem. I say it’s relative—it all comes down to your credit utilization ratio.  

Your card utilization ratio is a crucial factor in your credit score, and keeping your ratio below 30% is essential to maintain a good score.  

There are several ways to calculate your current credit card utilization ratio. Dividing your total credit card balance by your total credit limit is the most common. For example, if you have a $1,000 credit limit and a $300 balance, your credit card utilization ratio would be 30%. 

To get an accurate picture of your credit card utilization ratio, consider all of your open lines of credit—not just individual cards. For instance, if you have three cards with $500 limits and $150 balances on each, your overall credit card utilization ratio would be 15%. 

Keeping your credit card utilization ratio below 30% shows creditors that you’re using your credit responsibly. On the other hand, if your ratio is too high, it can ding your credit score and make it harder to get approved for new lines of credit. 

The dangers of having too much credit card debt 

Credit cards can be a great way to build credit and earn rewards, but they can also lead to debt if you’re not careful. Understanding how credit cards work and the potential dangers of carrying a balance is vital—credit card debt can quickly spiral out of control if you make only the minimum monthly payment.  

Otherwise, the interest charges add up, and you’re hundreds or even thousands of dollars in debt before you know it. By understanding the dangers of credit card debt and how to avoid them, you can use credit cards responsibly and avoid financial problems. 

Tips for getting out of unwanted credit card debt  

If you are already in credit card debt, here are some things you can do to get back on the road to financial wellness.  

Stop using your credit cards 

Every time you charge something on your card, it adds to your debt and makes it much harder to pay off. I know it’s tough to stop once you get used to using your card, so check out the Credit Counseling Society’s tips on how to cut back.  

Budget to chip away at your debt

Find out how much money you have coming in each month and how much your fixed expenses are (like rent or mortgage payments). Then use whatever is left over to pay down your debt as quickly as possible. To keep budgeting simple, I like the 50-30-20 method. 

Get professional help

Finally, consider talking to a financial advisor or counselor who can help you develop a plan to get out of debt and improve your financial situation. Everyone’s situation is unique, so seeking personalized guidance is your best bet.  

Tips for avoiding credit card debt in the future 

It’s no secret that credit card debt can quickly spiral out of control (ahem, I should know). Interest charges and late fees can add up. Before you know it, you’re dealing with a towering balance that seems impossible to pay off (it’s not!) 

So here are a few tips for keeping credit card balances under control going forward.  

Trim spending where you can  

Look at your spending habits and see where you can cut back. For example, do you have any recurring subscriptions or memberships you no longer use? Are there any unnecessary expenses that you can eliminate? Even small changes can make a big difference in your overall balance.  

Don’t trust the minimum payment suggestion

Additionally, try to pay more than the minimum payment each month. This will help you to chip away at your debt more quickly and avoid accruing additional interest charges.  

Consider a balance transfer

Finally, transfer your balance to a card with a lower interest rate if you can. This will save you money in the long run and help you to get out of debt more quickly.  

The bottom line on credit card balances

Achieving financial wellness can be challenging to do alone, so we built Julep. Julep is an app that uses psychology to help you improve your relationship with money to stop stressing and start reaching your financial goals sooner.