How Much Credit Card Debt is OK?

At a time when many people are once again finding their financial footing and wading back into the credit pool, the question of “how much credit card debt is OK” is commonly asked. The answer? It really depends on who is asking. For most people, it comes down to their abilities – their ability to manage money, their ability to pay down debt, and their ability to control spending. For people lacking in these abilities, any amount of credit card debt is too much. The moment they find themselves only able to afford a minimum payment one month is the moment they may be carrying too much debt. For others, some commonly applied rules can guide them, but they do assume that people can follow them.

20 percent rule

This rule is applied to your income so that, at no time will your total debt outlay exceed 20 percent of your income. So, for example, if your income is $5,000 per month, your total debt payment should not exceed $1,000. This rule works if the debt you are carrying is of the fixed interest variety, such as a mortgage, an auto loan, or an installment loan. If a significant portion of your debt is in credit cards, you stand the risk of “debt creep,” where your interest payments can increase due to the variable rates on credit cards.

30 percent rule

This rule is applied to your total credit limit available. If you carry three credit cards with a total credit limit of $10,000, your outstanding debt should be no higher than $3,000. The credit bureaus apply this factor in measuring your credit score. If your debt-to-credit limit ratio exceeds 30 percent, your credit score will take a hit. The assumption is that people who carry higher balances either have difficulty paying down their debt or rely too heavily on debt, both of which are major red flags.

The Fallacy of Rules

The main problem with rules is that they are made to be broken. While they can be useful in providing general guidelines, they do not always account for individual circumstances, which may render them ineffective.

Generally, any credit card debt is too much debt. Without a deliberate plan and the ability to pay down credit card debt within a relatively short period, the cost of carrying credit card debt can never be justified. Granted, there are some circumstances in which a financial hardship or a significant emergency expense might require running up a credit card balance, but, short of that, any credit card debt without the ability to pay it down within six months is a potential problem.