How much is too much credit card debt?
Surging inflation and rising interest rates have left millions of Americans relying on credit cards to cover everyday expenses. Middle-class households are struggling the most to pay down these balances. More families have shifted to a pattern of “survival debt.” Survival debt refers to money borrowed explicitly to cover basic, essential living expenses, like food, housing, utilities, and medical expenses, rather than discretionary purchases.
America’s credit card balance is a staggering $1.25 trillion, up from $1.18 trillion in the same quarter last year. The average interest rates on credit cards rose to 21% in February, from 14.6% in February 2022, according to a survey by the Federal Reserve.
With the rising cost of food, housing, and healthcare there is less money to pay down credit card debt. Consumers have been forced to make some tough decisions. Not wanting to lose their car or their home, people are likely to stop paying their credit cards, first.
Credit counseling agencies have seen an uptick in clients by 60%, since 2018. The National Foundation for Credit Counseling, a network of nonprofits that helps people reduce credit-card debt, said it had 24% more clients in January than a year earlier.
People carry an average of about $6,500 to $6,700 in credit card debt, according to credit-reporting agencies. The percentage of cardholders with balances of more than $10,000 has risen in communities across different income levels since 2018, analysis from the Urban Institute data shows. Last year, 17% of cardholders in low-income communities held balances greater than that amount, 20% in medium-income communities and 25% in higher-income communities.
While each consumer’s financial situation is different, there are ways to determine if you are carrying too much credit card debt.
Consider your answers to the following questions:
- Is your credit card debt impacting your financial and emotional health? Carrying large amounts of credit card debt can damage your credit score and cause you to experience financial and emotional stress. A good rule of thumb is to ensure your monthly payments are not more than 10 percent of your monthly income.
- Are you paying only the minimum? Credit cards typically have low monthly minimum payments, but that doesn’t mean they are affordable just because you can cover that amount. If you are only able to make the minimum payment, that can be a sign you have too much credit card debt.
- Is your credit card debt impacting your credit score? Credit cards can help your credit score- or hurt it, depending on how you use them. It is recommended that you keep your credit utilization below 30 percent. Having significant credit card debt can have a negative impact on your credit score. This can make other debts, like your mortgage and car payments more expensive.
As bankruptcy attorneys, we see credit card debt as one of the most common problems facing those with serious financial challenges.
Filing for bankruptcy is a viable option for those struggling with insurmountable credit card debt. Chapter 7 is the fastest form of consumer bankruptcy and forgives most unsecured debts like credit card debt, medical bills, and personal loans. There are certain qualifications a consumer must meet in regard to income, assets, and expenses to file for Chapter 7 bankruptcy, which is determined by the bankruptcy means test.
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