It is all just a juggling act really. I am talking about yours, mine, heck everybody’s finances. We juggle our income, whether it be from one source or two or many sources, to cover not only the standard monthly bills but those unexpected life costs that suddenly spring up as well. And we do that through a variety of methods; we pay cash or we may write a check, we may set up online pay, or we may whip out the plastic and use the trusty credit card. However, that balancing act is precarious, especially in the crazy times we are living.
And how well you can balance your incoming and outgoing cash flow really dictates the quality of life you will have. All too often, our credit cards have become that floating device, the giant net, if you will, below our high wire budgeting act. Our reliance on our credit cards has raised some interesting questions and placed many of us in some interesting situations.
How much credit card debt is too much?
The first and probably the most interesting question that pops into, or at least should, everyone’s mind is just exactly how much credit card debt can or should I carry? The short answer, okay real short, is you should try to be spending roughly 10% of your net income for your credit card payments. But the fact of the matter is that exactly how much credit card debt is too much will vary widely from individual to individual. So, for the sake of argument, lets delve into this question a little deeper.
A U.S. News website list six criteria to help you determine is you have to much credit card debt. Here are the six things to consider (in no particular order):
- Are you making the minimum payment?
- Are your credit card payments higher than your other bills?
- Do you have maxed out credit cards?
- Is your credit utilization ratio high?
- Are you using credit cards to pay off your credit cards?
- Do you have a high debt-to-income ratio?
Some of these are fairly straight forward, while others might be a bit confusing. So now we will get to work on clearing up some of that confusion, starting with the credit utilization ratio.
What is credit utilization ratio?
According to Experian website, credit utilization ratio is “the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available.” Okay, so that is great; but, what does that even mean? Putting it into simple plain language, it basically means to get your credit utilization ratio, and by the way the credit utilization ratio is also known as credit utilization rate, a person would take how much they currently owe and divide that number by their credit limit. This is important to understand because the credit bureaus use this number to help determine your credit score. In fact, this number and count towards 30% of your credit score! I bet you didn’t know that. I know I didn’t! So how does this work?
Quite simply, a higher ration number can indicate that you are spending above your limits whereas a lower ratio could indicate that you are managing your debt fairly well. You just might want to keep this in mind the next time you decide to use your credit card to pay for your next impulse buy.
What is debt-to-income ratio?
According to the Consumer Financial Protection Bureau website, a person’s “debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.” This number plays such a huge part of how lenders decide who gets a mortgage and for how much. It is so important that I feel an example to help explain it further is warranted.
For example, let’s say your monthly debts include mortgage/rent ($500), utilities ($250), cell phone ($100), car payment ($300), and insurances ($200). I know this is far from a complete list of monthly expenses, but it will do for this example. The total of monthly debts is $1350. Now let’s say your gross monthly income (what you make before any taxes are taken out) is $4000. Now that we have those two numbers, we divide $1350 by $3714. The answer is, rounded up, 36%; and that is your debt-to-income ratio.
Why is using one credit card to pay off another credit card bad?
According to the folks over at Nerd Wallet, it is almost impossible pay a portion or all of the debt on one credit card by using another credit card. So, you cannot use your Mastercard to make your Visa’s monthly payment. And for the most part this is a policy most credit card companies have. However, there is an option; not a great option, but still, it is an option. And that is the balance transfer.
The brass tacks of the balance transfer are using one credit card to pay off (or transfer) the entire balance of another credit card to it. For example, let’s say you are carrying a balance of $1500 on credit card A. You then use credit card B, which has a balance of $0, to pay off all $1500 on credit card A. Now credit card A is at $0 and credit card B is at $1500. So why do this? Well honestly there is only one reason to do this; and that is to save on interest.
Using our example from earlier, let’s say credit card A has an interest rate (APR) of 22.5%. Now let’s say that credit card B has an APR of only 15.75%. In that situation it would make sense to transfer the balance from credit card A to credit card B. You really haven’t paid off the debt, obviously; however, you will be ‘saving money’ by making payments to the credit card company with the lower interest rate.
How much debt does the average person have?
According to the website Valuepenguin.com, the average amount of debt per American household is approximately $5700. Sorting through the numbers a little more thoroughly, we find that, on average, men ($7407) carry 22% more debt than women ($5245).
We also find that when comparing average credit card debt by race, those individuals that identify as white only carry the most ($7942) while those individuals identifying as black only carried the least amount ($6172); which happens to be about 20% below the national average!
How do the statistics pan out when looking age? The average credit card debt held by 45 to 54-years old was $9096, the most by any age group by far. The Seventy-five years old and older group comes in as the group carrying the lowest amount of credit card debt with $5638.
What do I do if I have too much credit card debt?
The first thing to do when you finally come to realize that you are carrying way too much credit card debt is to take a step back and a deep breathe. Now that that is done, next you need to organize and acknowledge all your debt; make a ledger or spreadsheet listing all of your debts with their corresponding amounts and minimum payments due.
Once that is done, set it aside and get to work on a household budget. This is where you list all your monthly sources of income as well as all your monthly expenses. Be honest when filling this out! There is a great pdf download from the guys over at Debt Reset US if you need help. This is the point where you put together your repayment strategy; where can you cut back on expense, do you need to add a second or third job, what about debt relief programs, etc.
Once you have your strategy, you need to implement it, today! Do not wait to get started. And once you start, stick with it until you reach your goal, being debt free.
I know this can be a daunting task; but fear not, you are not alone! Millions of people are in the same situation. So, don’t be afraid to reach out for support. Don’t be afraid to ask for help. Consult with trusted family members and friends. Seek out advice from reputable consultants and companies. The help is out there, you just need to take of the challenge of finding it.