It is a bad idea to have a high credit card debt because it is very easy to spiral out of control. If your credit card debt ratio is above 10% in 2022, it’s safe to say that you can start worrying about credit card debt being too high.
One of the ways you can gauge your debt is through credit card debt ratio. It is what its name implies. It compares your credit debt against your income and measures how much of your disposable income is spent on payment of your debt.
Ideally, only 10% of your net income should be enough to cover your credit card debt. If you’re spending more than 10% of this income on credit payments, you have a higher than normal debt.
Credit debt is very easy to explode because enough of it can make paying-off difficult and every time you skip a payment in a bill cycle, you incur late fees and higher interest rates that only make it worse.
You’d want to manage your debt efficiently. And the first step to managing debt efficiently is to watch out for signs of increasing credit debt. Here’s what to look out for.
1- High Credit Utilization Ratio
Credit Utilization is your credit spending relative to the credit you have available (credit limit). The rule of thumb is that your credit utilization should be below or at 30%. If your credit utilization is above 30% on a single credit card, it’s one of the surest signs that you’re incurring unhealthy levels of credit debt. Worse, credit utilization above 30% is also bad for your credit score.
2- High Credit Card Debt Ratio
High Credit Card Debt Ratio is probably the most important metric in measuring whether you have too much in credit card debt. As discussed earlier, it measures your credit card debt against your net income.
You can find it yourself by simply dividing your overall credit card debt by your net income, and if the ratio exceeds 10%, you’re in troubled waters.
3- High Debt to Income Ratio
If your overall debt is making more than 35% of your income, it signifies that your debt is higher than normal. You should always maintain your debt below 35% of your income. So for instance, if your monthly income is $5000, your credit debt should not exceed $1750 (assuming that credit card debt is the only kind of debt you owe).
It’s worth noting, however, that Debt to Income Ratio measures your overall debt like revolving debt and non-revolving debt like loans, mortgages etc.
So having a credit card debt of 35% of your income does not accurately reflect debt health, since it includes your overall dues and some dues have lower interest rates and are also considered healthier than credit card debt.
You can be at several disadvantages if your credit card debt is too high. They’ve been discussed below.
4 Disadvantages of Having High Credit Debt
1- Credit Score Decline
Having a high credit card liability does not directly decrease credit score but can decrease it several points indirectly. For instance, you’re more likely to miss payments on credit billing cycles if your debt is too high for you to manage.
Failing to pay your credit bills directly causes a fall in credit score. Another way you can cause a decline in your credit score is if your credit utilization ratio exceeds 30% which is again, positively correlated with high credit card debt.
2- Risk of Default
If your debt is too high for you to manage, you risk default on your credit account. That way, you would risk garnishment of either your bank account or wages by debt collection agencies. Not only that, defaulting would have serious implications for your credit score, and you might have to start from scratch rebuilding it.
3- Applying For Further Credit Becomes Difficult and Costly
Lenders can be wary of granting you loans, mortgage or more credit cards if your credit reports show high and poorly managed credit card debt. If you still managed to get credit, it’d come at the cost of a relatively higher interest rate than what you’d normally get.
4- Poor Financial Health
High debt as a result of poor debt management can lead to poor financial health. You might have to cut expenses and compromise on your standard of living to be able to pay off your debt.
All is not lost though. There’s always ways to get out of high debt and manage your finances more efficiently. Here’s some of the ways you can do it.
How to Get Out of Credit Card Debt Efficiently
1- Go for Debt Avalanche Strategy
Debt Avalanche is a method of debt payment that is recommended when you owe multiple debts. When you are indebted through multiple lines of credit, it becomes harder to pay the loans back because all those different debts are subject to varying interest rates that keep adding to what you have to pay, increasing your debt with time. In this regard, Debt Avalanche’s point is to minimize what you ultimately have to pay in interest.
So, if you have a high debt in multiple credit cards, you should start by paying off the debt with the one that is subject to the highest interest rate. Then you should move to the one with the second-highest interest rate, and so on. This way, you can minimize what you ultimately pay in interest.
2- Look into Debt Settlement
If your credit debt is high enough for you to be unable to pay, you can contact your lender and negotiate with them to decrease the amount that is due. Credit card debt is usually unsecured except for dues in secured credit cards, which means that creditors are not automatically entitled to a debt-equivalent portion of your wealth or assets.
Creditors usually sell your debt at massively discounted rates to debt collection agencies after you default. Those collection agencies then proceed with legal actions that can lead to garnishment of your wages or savings. If you can make a better deal to your creditor than what they’d get from collection agencies if they sold your debt, you might convince them to let go of some of your debt while paying the rest of the amount. It’s usually better to hire a professional firm to negotiate on your behalf to increase your likelihood of convincing the creditor.
3- Get a Debt Management Plan
You can also go for a debt management plan through a professional counsel agency. You then pay a set amount to the agency every month, which is channeled out to each of your debt. Debt management agencies can negotiate with your creditors and get you a lower interest rate. In rare cases, they can even successfully negotiate a cancellation of your debt.
4- Get a Debt Consolidation Loan
If you’re subject to unpayable credit card debt through multiple credit cards, each with a separate interest, you can apply for a debt consolidation loan. Debt Consolidation loan is a type of loan that you can take to pay off multiple debts at once. The idea is to avoid multiple and increasing interests on different credit debts by replacing them with one loan with a single interest rate that is lower when compared to multiple interests.
- We're here with great experience in WordPress & SEO about 3 years. If you need any professional WordPress or SEO Optimizations etc, Our high-quality work is 1000% guaranteed.