Paying down your entire credit card bill each month is the best approach to handle a credit card. This shrewd move may help you avoid paying exorbitant interest fees while simultaneously preserving your credit score. In contrast, some customers could decide to use a credit card with a balance when they require urgent financing. Due to spending too much or not following a budget, it can also be simple to carry a credit card balance from one month to the next without making preparations.
Whatever the reason for your credit card debt, you may at some time begin to worry if you are overextending yourself. The question of “How much credit card debt is too much?” does not have a single, definitive solution. However, there are methods to determine whether you might be taking on too much risk given your credit and financial status. We’ll offer some helpful background and advice for this examination.
Do I have too much credit card debt?
Our examination of data from the Federal Reserve Bank of New York and the U.S. Census Bureau shows that the average credit card balance in the country is $7,951. Even so, it’s still conceivable that you have too much credit card debt for your financial circumstances if your overall credit card debt is significantly lower than the national average.
The ideal approach to handle your accounts and prevent interest is to pay off the entire sum on each of your credit cards each month, as was already explained. If, however, you are now unable to pay off your full sums, you can find out if you have an excessive amount of credit card debt by asking yourself the following questions:
- Are you spending more money than you earn?
- Do you struggle to pay your bills?
- Are your credit card balances increasing each month?
- Can you pay more than the minimum payments on your credit cards?
- Are you able to save money for emergencies and other financial goals?
- Is the balance-to-limit relationship (aka utilization ratio) high on any of your credit cards?
- Do you worry that you’re wasting money on interest charges?
If you answer yes to any of the questions above, it could be a warning sign that you have too much credit card debt.
How credit card debt affects you
Using your credit card for the majority of your purchases can be a wise move that comes with a variety of benefits, including the chance to establish credit and fraud protection. Additionally, rewards credit cards might give you the opportunity to accrue points, miles, or cash back on purchases that you must make anyhow.
But for this plan to be effective, you must make on-time, complete credit card payments each month. Otherwise, credit card debt can negatively affect your life in a number of ways. Even if you pay the minimum amount due on time each month, allowing such debt to develop will affect your finances and your credit score.
According to the Federal Reserve, the average credit card rate for interest-bearing accounts has varied over the past few years from about 16% to as high as 20%, and some credit card APRs can go considerably higher. Because of this, using a credit card to finance a balance might be expensive (unless you take advantage of a credit card offer with a 0% APR).
For instance, if you consistently carried a $10,000 load with a 20% APR on your credit card, you would pay around $165 in interest each month.
A low credit score may also be caused by credit card debt. Your credit usage ratio, or the difference between your credit card limits and balances, is a factor taken into account by credit scoring models like FICO® and VantageScore®. Your credit score will normally drop in reaction to an increase in this ratio. In other words, your credit score is more likely to decline the closer you go to maxing out your credit cards.
From the perspective of your credit score, using less of your available credit is preferable. Generally speaking, you should strive to maintain your credit usage percentage around 10% and make on-time credit card payments every single time. For instance, if your credit card has a $500 limit and you have a $50 amount, that card is 10% used.
How to get out of credit card debt
If you’re ready to start paying down your credit card debt, the following tips may help:
- Choose a debt payoff strategy. You might be able to pay off your debt more quickly and possibly even save money if you have a good debt elimination plan in place. Two of the most widely used strategies for getting out of credit card debt are the debt snowball and debt avalanche. Both tactics require you to pay off the balances on your credit cards in a specific order, either beginning with the account with the lowest balance or the highest interest rate. Both strategies have advantages, but you need do some study to determine which is best for your circumstances.
- Cut expenses. Finding ways to save money and cut back on your spending may allow you to have more money in your budget to put toward paying off your credit card debt.
- Consider debt consolidation. If your credit is in good standing, you might be eligible for a personal loan or balance transfer credit card to pay off your credit card debt. As you attempt to reduce your outstanding balances, consolidating debt at a reduced interest rate is one possible alternative that could help you save money on high interest costs. After consolidating your accounts, take note that it’s crucial to refrain from overspending on your original accounts. Otherwise, you risk causing more serious financial issues in the future.
Tips for managing multiple credit cards
The most recent Experian data show that the average American has 3.84 credit card accounts. There is no ideal amount of credit cards, although many people find it advantageous to carry a variety of cards.
Are you unsure of the ideal number of credit cards to open? It’s critical to consider how many accounts you’re certain you can manage responsibly. The following three suggestions can assist you in managing several credit cards:
- Track your spending. It’s crucial to monitor your credit card spending so you don’t go over your budget, whether you do it with a personal finance software or a traditional spreadsheet.
- Schedule automatic payments. Being busy makes it far too simple to forget to pay a bill before the due date, especially if you have several credit cards. However, to help you avoid these errors, the majority of credit card companies will let you plan automatic payment drafts from your bank account.
- Set up transaction alerts. Transaction alerts—also known as texts or emails—may be sent by your credit card company to let you know when specific activity occur on your account. You might be able to plan SMS alerts to inform you, for instance, when your monthly payment is due, your balance is growing close to your credit limit, or a transaction posts to your account that exceeds a specific dollar amount.
