High credit card debt means the difficulty of paying off the outstanding balances on the credit cards within the next coming year.
Credit cards have also been noted to be among the most common sources of financial strain among people in the United States of America. Living in a world with credit cards, where people can borrow money easily and spend money is seen as a way of showing society that they are ‘somebody,’ it is not surprising that an average US household has a balance of nearly $6,200 on their credit cards. However, the question, of how many credit card holders it becomes risky to borrow money is rather pertinent. When do credit card balances become a point of concern or worry?
This paper defines high credit card debt.
As for the concept of using credit cards, or ‘high’ credit card balances, there is no set definitive meaning. In general, your credit card balances shouldn't exceed 30% of the credit limit granted to consumers. It is usually advised that your total credit utilization should not exceed 30% of your overall credit limit that you have across all the cards. If the proportion exceeds 30%, your credit score will be affected and the lenders will consider you as a high-risk client.
However, any credit card debt that is taken and cannot be paid off in full each month is normally viewed as unhealthy. Credit card debt especially if it is not settled in full every month is very expensive and it does not take a lot of money before it accumulates into high interest rates. The gem is to ensure that the credit card balances are kept sufficiently low and that one can repay the amount in full on the statement, while also meeting other financial obligations.
High credit card debt signs
There are many signs that you are falling into a cycle of credit card debt that may be difficult to handle.
Here are some key warning signs:
- Only making minimum payments: If you regularly choose to pay the minimum amount due on your credit card statements, then you may be headed for sinking sand. There is a steep interest charged when one is not in a position to pay the principal balances.
- Using cards for necessities: The other sign that one needs help is when they use their credit cards to pay for necessities such as food, water, and electricity bills among others. Dependence on borrowing to cater for your expenses means your cash flow may be unsustainable.
- Maxing out cards: The ideal credit utilization ratio is one-third, that is, the percentage of your total credit line that you use should not exceed 30%. In such a case, using up the available limit on the cards could be detrimental and affect the credit score.
- Juggling balances: If you are regularly transferring balances from one credit card to another to pay low or no interest for the first few months, then it is quite clear that your credit card debt is not very easy to handle.
- Ignoring statements: Refusing to look at the credit card statements because you are afraid of the balances is disastrous for managing the credit card balances.
Excessive Credit Card Usage and its Implications
But if you want to be safer, credit analysts advise that credit card balances should not exceed 5% of gross income in a given year. For example, the recommended credit card balance for those who make $50,000 a year before tax would be $2,500. But as far as the amounts of credit card debt are concerned, less is the better, and no credit card debt at all is the best.
Thus the question: When does credit card debt rise to the level of true distress?
Here are some benchmarks commonly used to define excessive credit card balances:
- Over 10% of annual income: This means that if one’s credit card balance is over 10% of their gross annual income, then one needs to start managing their spending habits. At this level, you will be facing the problem of struggling to clear your balance in a reasonable time.
- Over 20% of annual income: If you have more than credit card balances that are 20 percent of your salary, there is no way to pay more than minimum balance payments. It may even become difficult for you to manage your debts thus turning into out-of-control debts.
- Over 50% of available credit: When you use more than half of the total credit limits, then it means you are a culprit of your debt more than the credit given to you. It will also greatly affect your credit utilization and credit score and therefore it is not good to take a cash advance if you want to maintain a good credit standing.
The following are the various ways of coming up with a plan for handling high credit card balances:
If you recognize your current credit card debt as dangerously high based on the above criteria, here are some debt payoff strategies to consider:
- Seek lower interest rates: Call your credit card companies to negotiate interest rates on balances so you can avoid paying high amounts of interest. Such a margin may not seem like much, but it can indeed make a lot of difference.
- Consolidate with a personal loan: Maybe you should consolidate your credit card debt so that you only pay one debt at an affordable interest rate unsecured personal loan. Ensure to either reduce the usage of the cards or even return the cards to the respective issuing company.
- Employ the debt snowball method: Rank your debts by the balances starting with the smallest one, and pay at least the minimum on all except the one with the smallest balance which should be attacked with zeal. The most preferred approach is to start paying off the card with the least balance and once it is cleared, take its amount to pay off the next card, and so on.
- Spend less overall: Develop a strict budget where you eliminate as much of it as you can to ensure that you channel as much money to paying your debts as possible. Reducing costs allows spending more on credit cards because payments for balances take up a huge amount.
It is easiest to deal with credit card debt when it becomes unmanageable, early intervention the easier to deal with. This just means that instead of having signs that point to high balances, high-interest costs are just allowed to build and debts increase. Exercise more control over your spending and ensure that your repayment methods are sound before your credit card balances become lethal.
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