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How Much Credit Card Debt Is Too Much?

Kevin Cash

Credit card debt is on the rise. According to data released by the New York Federal Reserve in November 2018, credit card debt is up by $36 billion in the last year. And you may be paying the costs. How do you know when your credit card debt goes from normal to out of control? Here's a look at the warning signs.

Do I Have Too Much Credit Card Debt?

Here are six indications that you might have too much credit card debt:

-- Your credit utilization ratio is high.

-- You're paying off credit cards with other credit cards.

-- You're only making minimum payments on your balance.

-- You have a high debt-to-income ratio.

-- You're maxing out credit cards.

-- Card debt payments are high compared with other bills.

[Read: Best Zero Percent APR Credit Cards.]

Your credit utilization ratio is high. When you use a lot of your available credit, it can indicate you have too much debt and possibly deter lenders. An important judge of this is your credit utilization ratio, the proportion of the credit you use versus what you have available. It's assessed by card and in total. While there's no set standard on what is considered too high for a credit utilization ratio, many financial experts say you should aim for 30 percent or below.

There is a difference between using more than 30 percent of your available credit and paying it off before the end of your statement period, and regularly having a credit utilization over 30 percent. The former isn't much of a problem -- if you can pay off most, if not all, of your debt before your issuer reports your balance to the credit bureaus, you're in good shape. The latter -- having a high credit utilization ratio month to month -- may be an indication that you have too much debt.

Reducing your credit utilization ratio to 30 percent or less won't necessarily rid you of your debt woes, but it can indicate that you're getting your debt under control and potentially nearing debt freedom.

You're paying off credit cards with other credit cards. If you find yourself trying to pay off a credit card with another card, you may have too much debt on your hands. Most credit card issuers won't allow you to do this directly. It's not impossible, but it will probably cost more than it's worth.

But not having enough cash on hand to make even the minimum payment on your credit card may signal that you're spending beyond your means. Use the situation as an opportunity to examine the source of your debt and try to correct it.

You're only making minimum payments on your balance. Only making minimum payments means you're barely making a dent in your debt load, as your minimum payment may only cover interest, fees and a small percentage of your balance. Making minimum payments is like treading water; there's a limit to how long you can do it before it's too much to handle.

You have a high debt-to-income ratio. A high debt-to-income ratio is usually as indication that you have more debt than you can afford. Your debt-to-income ratio is the amount of your monthly debt payments compared with your monthly income. When your debt payments take up a significant portion of your budget each month, that puts pressure on other parts of your budget.

"For people who want to make a big purchase in the future, such as a car or house, they should be aware that lenders typically want a total debt-to-income level between 30 and 40 percent," says Dean Kaplan, president of The Kaplan Group, a debt collection agency.

You may not qualify for some mortgage programs if your debt-to-income ratio exceeds 43 percent. If your debt-to-income ratio is mostly made up of credit card debt and threatens your ability to be approved for credit products, you probably have too much credit card debt.

You're maxing out credit cards. If you're spending enough on your credit cards to regularly hit your spending limit, it may be an indication that your debt has gotten out of control.

Card debt payments are high compared with other bills. Add all of your individual card payments together. If that number is nearing what you spend on your mortgage and auto loan payments, you may have too much debt.

Consequences of Too Much Credit Card Debt

If debt payments are putting pressure on your budget, you may need to use your credit card to buy necessities, perpetuating the cycle of debt. Other factors like reductions in credit score come into play, too.

Your debt could increase quickly. Credit card interest accumulates as a percentage of your balance. The higher your balance, the more interest you'll incur. And the more your interest charges grow, the more your balance grows. This cycle can dig a debt hole that's hard to escape.

Your credit score could suffer. Holding too much credit card debt can increase your credit utilization ratio and hurt your credit score. The same goes for holding so much debt that you can't make your credit card payments. Payment history is the most important component of your FICO credit score, so missing payments can result in even larger credit score reductions.

It may be hard to qualify for other financial products. If your credit score is poor and your debt-to-income ratio high, it can be difficult to qualify for auto loans, mortgages and credit cards. The consequences of bad credit can range from inconvenient to life-altering.

You could go into collections. If you have so much credit card debt that you can't make minimum payments, your issuer may sell your debt to a collections agency after a few months of missed payments. Going into collections will typically have a substantial negative impact on your credit score and can result in regular calls from debt collectors seeking payment.

You could have wages garnished. The owner of your debt could get a court order to garnish your wages until the debt is repaid. There are limitations on how much can be garnished, but having money automatically deducted from your paycheck -- whatever the amount -- is a tough situation to be in.

How to Get Out of Credit Card Debt

Realizing and accepting you have too much debt is the first step to paying it off. With some strategic planning and commitment, eliminating even a large amount of debt is possible.

Create a budget. If you've realized you're in over your head in debt, a good course of action is to figure out how you got there in the first place.

Plan out how you'll afford credit card payments and recurring and upcoming expenses, comparing your expenses with your income. Your income should exceed your expenses, allowing you to make savings contributions or at least have some wiggle room in your budget. If your expenses exceed your income, you'll need to make cuts.

Take a look at your recent statements. You might find a number of ways to cut excess spending and put that savings toward your credit card payments. For example, you might discover you've been wasting money on things you don't need: a forgotten streaming service, an old app subscription, monthly payments for magazines that remain unread.

Services like Truebill and Trim automatically scan your credit and debit card statements for recurring bills, making it easier to determine which services you really need and which you can cut out. In some cases, these apps will even negotiate on your behalf to get you a lower rate on bills for things like cable or cellphone service. The apps may take a cut of your savings as payment. It's possible to spot savings yourself and negotiate directly, but using these apps can make it easier, especially if you're likely to put off calling to lower your bills. All of the savings you get from reducing bills can go toward debt payments.

Transfer your balance to another card. A balance transfer card allows you to move a balance from one credit card to another. Usually, these cards offer a zero percent APR on balance transfers for an introductory period, often 12 to 18 months. Transferring your balance to another card won't instantly eliminate your debt. But it can pause interest accrual, making it easier to pay down your card's balance.

[Read: Best Balance Transfer Credit Cards.]

The main factors to consider during a balance transfer are the new card's transfer fee, the length of its promotional annual percentage rate and its regular APR. Compare all of these factors side by side before you decide.

Balance transfer fees usually range from 3 to 5 percent of the balance. If you're transferring a $4,000 balance at 3 percent, that's $120 tacked on to what you owe. While that may seem like a lot of money, it might be pretty small compared with what you might pay in interest on your existing card. For example, if you're paying off the same balance over 12 months on a card with a rate of 16 percent, you'd pay about $355 in interest. In this case, the balance transfer becomes a good deal.

In addition to the promotional APR, you'll also want to look at the card's regular APR, which sets in after the promotional APR expires. It could be substantially higher than the APR on the card you plan to transfer your debt from. And if you can't pay off your balance during the promotion, you'll be paying the new card's regular interest rate.

Get a debt consolidation loan. Many lenders offer loans to pay off multiple debts at once. If you're holding balances on multiple credit cards, getting a debt consolidation loan can save you money while reducing many payments to one, making your payment more manageable.

Try to shop around for the best rate. Even if your credit score is less than perfect, you may still qualify for a debt consolidation loan. Just be sure to factor in interest rates, fees and other costs when comparing the costs of a loan to the interest you pay on your credit card debt.

[Read: Best Low-Interest Credit Cards.]

Negotiate a repayment plan. You may be able to call your credit card issuer and negotiate a repayment plan, especially if you're at risk of default. One type of plan is called a workout agreement. Under that type of plan, your credit card issuer may waive or reduce your minimum monthly payment, lower your interest rate and remove past late fees. However, your account may be closed to new charges under the agreement, which caps your credit line at your balance and can increase your credit utilization ratio.

"Creditors want consumers to make their monthly payments. When a borrower is unable to make the payments and the account goes to collections, they get pennies on the dollar, if they get paid at all," says Randall Yates, founder and CEO of The Lenders Network, an online mortgage marketplace.

A good first step is to provide your card issuer with as much detail on your situation as possible. "Contact your creditors and let them know you're not able to make the minimum payments," says Yates.

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