First, you put the cost of a couch for your new apartment on your credit card. Then, your car needs new brakes so you put that on your credit card, too. Before you know it, you’re about to book a ticket to Maui on your credit card. But how much credit card debt might be okay, and how much credit card debt is too much?
Managing Monthly Credit Card Payments
Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.
Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many— and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.
For example, let’s say you have $5,000 worth of debt with a 16.71% interest rate and are paying off $100 a month. At that rate, it would take you more than five years to pay off the original $5,000 and would cost you an extra $3,616 in interest alone.
Curious how your credit card payments stack up? Use SoFi’s credit card interest calculator to see exactly how much you can expect to pay in interest. Pesky compound interest means that simply tackling minimum payments on your credit card doesn’t necessarily mean you’re in the clear with your credit card debt.
In general, looking at how much your monthly payments may not be the most reliable indicator of a safe debt threshold.
Credit Card Utilization
One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.
Related: What is the Average Credit Card Debt for a 30-Year Old?
It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available . Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.
What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400—or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.
If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential of negatively impacting your credit score.
If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.
Debt-to-Income Ratio
Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.
If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.
This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments—if you’re able to get a loan at all.
In general, industry professionals suggest that a debt-to-income ratio of about 36% or lower is considered ideal , but of course, that will vary by your specific circumstances.
If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.
Keeping Credit Card Debt in Check
If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control. First, consider making more than the minimum payment. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.
Likewise, if you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate.
Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt. One of the downsides to credit cards is notoriously high interest rates. One solution—using a personal loan to pay off your credit cards—may help you take control of your credit card debt and save you some money on your monthly payments.
The benefit of paying off your credit cards with a personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of trying to pay off the minimum amount due on your credit card, which can make you feel like you’ll never get out from underneath credit card debt.
Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.
And in the future, keep an eye on your credit limit when you’re making big purchases—it can pay off in the long run.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
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