Whether you think that you need credit card help or not, it always pays to match your financial situation against a few metrics that can provide a reality check about credit card debt in general.
Credit card debt can be very sneaky. Accumulating interest on revolving debt engulfs your finances before you realize the gravity of the situation. If you make minimum payments, you are doing the financial equivalent of treading water. You can stay afloat for a while, but your position is dangerous, to say the least.
Here, we take a look at some of the ways you can tell whether you have too much credit card debt. We'll discuss:
- Checking your credit utilization ratio
- Finding out your debt-to-income ratio
- Exploring your credit card debt ratio
- Identifying various other early signs of financial distress
How's Your Credit Utilization Ratio?
Your credit utilization is the ratio resulting from your current total balance divided by your total credit limit.
This ratio matters because it makes up about 30% of your overall credit score. From the perspective of lenders, the lower your credit utilization ratio, the more creditworthy you are.
Contrary to what you might have heard, you do not have to carry a credit card balance to improve your credit score. According to Experian, the credit utilization ratio of those with excellent credit scores (781-850) was just 5% in May 2020.
If you have a single credit card, with a $1,000 limit, and your balance is $200, you are using 20 percent of your available credit.
From a lender's point of view, if your credit utilization exceeds 30 percent, it may be a sign that you need some credit card debt help.
How's Your Debt-to-Income Ratio?
When considering your creditworthiness, lenders look at your debt-to-income ratio as well. To get your debt-to-income ratio, divide your total monthly debt payments by your total monthly gross income. Be sure to add up all of your debts.
The lower your debt-to-income ratio is, the better off you are financially. If your debt-to-income ratio is above 36 percent, that means you pay more than a third of your monthly gross income toward debt. If that is where you are, it is likely that you have too much credit card debt weighing you down.
According to the Consumer Financial Protection Bureau (CFPB), "evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments." A 43% debt-to-income ratio may make it harder for you to qualify for certain types of loans and will most likely make it nearly impossible to qualify for favorable interest rates on many types of loans.
How's Your Credit Card Debt Ratio?
To find your credit card debt ratio, divide your total monthly credit card payments by your total net monthly income. The result will tell you how much of the money you take home every month goes toward your credit cards.
Many financial advisors say that, as a general rule, credit card payments account for no more than 10% of your monthly net income. So, if you bring home $3,000 per month, your credit card payments should be no more than $300. Though that is just a general rule, sticking to that formula will help you avoid getting into excessive credit card debt.
What Are the Other Signs of Too Much Credit Card Debt?
Carrying too much credit card debt may manifest through other more or less subtle signs.
- You use one credit card to pay off another.
- You experience significant stress as a result of the collection efforts of your creditors.
- You max out your credit cards.
- Your credit card payments make up the bulk of your expenses.
- You are only capable of making minimum payments, or you miss a payment now and then.
- You have no savings.
- You had a plan for credit card debt settlement but failed.
Too much credit card debt will potentially:
- Hurt your credit score.
- Cause you to lose control of your finances.
- Put various financial products out of your reach.
- Push you into collections.
When Credit Card Debt Is Too Much to Handle Alone
If you have assessed your situation and feel that your credit card debt is out of control, you do not have to handle it alone anymore. You can regain control of your financial life by taking positive, proactive steps today. ClearOne Advantage can partner with you to help you find the best debt relief option for your credit card debt. Speak with a ClearOne Certified Debt Specialist today at 866-481-1597 and get a personalized debt relief plan. You can do this. We can help.