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How Much Credit Card Debt Is Too Much?

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How too much credit card debt can hurt your finances

If you are reading this article, it is probably because you believe you might have too much debt. If you’re not familiar with having debt, you’re probably a little nervous about it and want to do more research. If you were wondering, “how much credit card debt is too much?” We will help you figure it out.

It’s important to keep in mind that not everyone has the same income. For example, a million dollars in debt is not the same if you earn $60,000 a year and generate $10,000,000. It all depends on your income, so we will give you tools to calculate based on your salary. Let’s get started!

About Your Salary

The first information we need to collect to answer this question is how much money you have coming in. Obviously, this is crucial to calculate how much credit card debt is too much. Since we will not give you a fixed figure as to how much is too much or too little. It will depend on your salary and what you can afford to pay.

As this is completely personal and specific, we will use the results of the 2020 Census study as an example. We use this study because we believe that Census provides reliable data and because this study has not yet been conducted in 2021.

money salary

These rates indicate that the average income of a person working 8 hours a day, for 5 days a week is $61,000. In contrast, a woman doing the same job with the same weekly workload earns around $50,000.

We will simply average these two figures without getting into why this works this way. We can assume that the U.S. average salary is $55,000 per year. We will use this average to create a fairer measure in the rest of the article.

Your $55,000 Salary After Taxes

While you know that you collect a certain amount of money each month, this is not the total amount of money in your account. We are talking about the fact that you should not forget to pay your basic taxes in addition to contemplating your debt.

These are paid automatically with each paycheck, so you should still consider them even if you don’t actively pay them. This depends a lot on where you live and how much you earn, but we have some articles that can give you a general idea.

Tax documents

The taxes you must pay are Federal Income Tax, State Income Tax, Social security, and Medicare. To put it more briefly, we calculate that on an annual salary of $55,000, you will pay around $11,000, although this may vary depending on where you live.

Considering this, you only have about $43,000 a year after paying taxes.

Let’s Calculate Expenses

Now that we know how much money we will receive after paying taxes, we will manage our remaining money.

We will see what an American’s average expenses are to find out how much money a debt can affect your standard of living. To do this, we will rely on previous articles we have done on this website, which we also recommend you to read.

To do this, we must start dividing expenses into needs, wants, and debt payments.

To calculate more on a day-to-day basis, we will use your total monthly salary, which after taxes was reduced from $4,583 to $3,583. This is the result of dividing your $43,000 after taxes by 12 months of the year. With these facts in mind, let’s get started.

Budgeting

In our other articles, you will notice that we recommend dividing your income under the 50/30/20 rule.

  • 50% of your income for needs
  • 30% of your income for wants
  • 20% of your income for savings or debt payment

But in this case, we will not apply it since we will start from the fact that we want to know how much credit card debt is too much. Since we have another objective, we will not apply this rule, and we will only calculate the expenses.

Needs

This section is dedicated to those expenses that are practically obligatory, although it will depend on your situation. In most cases, these are the expenses that practically any person has, such as transportation, groceries, medical insurance, or housing. We will start with the last one.

Housing

Housing expenses can fluctuate a lot depending on the area where you pay your rent. This will depend a lot on where you live. For example, the cheapest places to live in the United States are West Virginia or Mississippi. In these places, the rent is around $750/$800, and it is affordable. On the other hand, places like New York can go as high as $2,500 for a room.

housing

To be more equitable, we decided to choose an average between both measures since it is something that depends on the personal case of each one. We calculated an average of $1090 per month in housing.

Utilities

According to the same Census study, a U.S. household spends approximately $172 per month on utilities. In this case, we assume that you will live alone so that the amount could be less. Between heating, water, electricity, gas, and the internet, you could be spending around $120 a month.

Groceries

In this case, it can also vary from person to person. It depends on how much you eat or follow a specific diet. We will use data from the U.S. Department of Agriculture in our case. According to them, a person living alone spends $330 on groceries per month.

Transportation

Here we have another case that will depend exclusively on your case. This can vary greatly depending on how you decide to move to work. It can vary if you have a car, take the bus, ride your bike to work, or do it from home.

Uber driver

As we cannot look at your case, we will use the data from Business Insider. According to this data, a U.S. citizen spends between $2,000 and $5,000 a year on transportation. Using an average of $3,000 would mean spending approximately $250 per month.

Insurance

The average health insurance expense in 2020 was $305. This number has not changed much in the last year, so it is still valid. If your spending is different, you should consider this when doing the calculations.

Total

It’s time to calculate your mandatory monthly expenses, so we need to add up all our figures:

$1,090 + $120 + $330 + $250 + $305 = $2,095

In total, you would be spending $2,095 of your $3,583 per month on mandatory expenses alone. That’s 58% of your total income. This means that you only have less than $1,500 a month left for you and your debt.

Make sure to do these calculations while adjusting your salary. By doing so, you will have an idea of how much debt you can pay per month.

Wants Or Debt Payments?

Now that we know that 58% of our income must go to purchases or required payments, we know that the remainder must go to pay down debt. In our hypothetical case, we have calculated that you take in $55,000 a year, which suggests that you now have about $1500 leftover.

It is at this point that your responsibility to manage comes into effect. We estimate that most people will allocate about $1,000 to their wants. So you can buy whatever you want to eat out, go to concerts, parties, cinemas or theaters. Even buy technology like consoles, cell phones, or whatever you want. In conclusion, that you use it to have fun.

However, if we must pay a debt, we need to keep in mind that there are certain activities that we must stop doing. Paying our debts in due time and form is mandatory, so we should not waste money when we commit ourselves in this way.

Debt credit

Let’s suppose we decide to stop spending money on some wants, and we reduce our budget from $1,000 to $500. In that case, we would be spending $2,590 out of our $3,583 monthly. That translates to 72% of our income.

All of this considers that we have already limited our standard of living to pay off the debt reasonably. In this case, we have 28% of our remaining income dedicated to paying off the debt.

On the other hand, if you were to heed our recommendation and decide not to reduce your wants spendings from $1000 to $500, you would spend $3,090 of your $3,583. This represents 86% of your income and a slightly more enjoyable number. In this case, you would have 14% of your income left to pay your debts.

Good Debt Or Bad Debt?

We have calculated that you are probably paying between 14% and 28% of your income in debt, but is this bad? Throughout this article, we have analyzed the word debt from a negative side.

Knowing how much credit card debt is too much depends on many things, among them, how you apply it. Going into debt to pay for a college education is not the same as buying all the latest model cell phones. However, if you know how to use debt wisely, it can be a great tool for growth.

Good Debt

Normally, good debt is the debt you take on to buy something useful to you in a financial manner. We are talking about assets that can be revalued in the future or generate more money in the long term. Some examples of good debt are:

  • College education: Paying for it can be complicated and even very difficult without debt. However, this will help you get a college degree, which translates into better jobs and earnings.        
  • Buy a car: It may be more difficult to increase the value of a car, but it is a great investment in other ways. If you are a person who needs transportation, a car will save you a lot of time out of your life. Taking on debt for a car is a logical thing to do, and no longer relying on public transportation will positively impact your life.
  • Buy a house: This is the most appropriate example of healthy debt. It doesn’t matter how much credit card debt is too much when buying a house. It may take a long time to pay off your mortgage, but it is something that will certainly appreciate in value. It’s a safe bet, and it’s a debt that is completely worth it.     
  • Create your own business: In this case, it is also almost mandatory to take on debt. If you would like to create your own business, you must consider that you must have a large initial expense. Many people cannot afford this initial expense, so they decide to take on debt. This is completely healthy if you know that you will generate enough money to pay off your debt. In addition, it will give you the opportunity that if your business venture turns out very well, you will be able to pay off your debt faster.
graduate

Bad Debt

Here we categorize all those expenses that do not positively impact your daily life. More specifically, we are talking about items that will lose value, such as clothing, technology, or travel. Since, in addition, these types of purchases are usually subject to fees with interest, so you would even be overpaying.

Debt To Income Ratio

Now that we know what type of debt it is advisable to take on, we must calculate what debt is and what is not. The debt to income ratio (DTI) is used to determine what percentage of your monthly income you use to pay off debt.

This measure is used to know if you are spending too much money to pay your debts and if you can still pay more. As we told you before, knowing how to manage your debts can be very useful. So calculating this can also help you if you are paying too little debt.

How To Calculate Your Debt To Income?

To start, you need to know how much your monthly income is, which we have already calculated above. Then it would help if you calculated how much you pay per month on your debts. You must rule out expenses such as housing, utilities, or home mortgage in this equation.

We are going to calculate a midpoint between the two options above, so we will assume that we spend $700 on debt payments. Now we must divide our debt payments by our home income, 700 / 3583 = 0.19. The result of this calculation should always be less than 1.

Once you have this result, you must multiply it by 100, and it will give you the percentage of your salary that you spend on DTI. It is 19%, but yours will depend on your income and expenses in our hypothetical case.

How Much DTI Percentage Is Advisable?

This is one of the questions that many people ask, and the truth is that it is not very appropriate. Since people have different personal incomes and expenses, it is a question that does not have a specific answer.

On some websites, you will find experts recommending that your DTI should not exceed 20%, others that it should not exceed 28%, and others 36%. The reality is that this is both true and false. The amount of debt you can take on depends on your income and your standard of living, and you can take on debt until it is affected.

debt to income

If I can get into debt until it starts to affect my day-to-day life, how do I know how much credit card debt is too much? Some signs that you are getting too much debt may be:

You Must Dip Into Your Savings To Pay

Your monthly income is no longer enough to pay for your expenses, and you must take the money you thought you were saving.

You Can No Longer Go Out To Have Fun

You have to think twice before going out to eat with friends or consuming entertainment since you pay first.

You Have To Ask Your Acquaintances For Money

If you have already spent your savings and have to resort to family and friends, you will be in trouble. This can not only be a problem in your life but also for your personal relationships.

Conclusion on Credit Card Debt

Accounting for an average worker, it is normal to earn about $55,000 per year. It is very complicated to assume a debt that represents more than 30% of your monthly income with a salary like this.

To pay such a debt, you have to compromise your standard of living, giving up any treats you want and limiting yourself to living to pay your debt. Would you be willing to work 3 of your 8 hours a day to pay for something you can’t enjoy?

We believe that it depends on your income about the initial question about how much credit card debt is too much. But whenever your debt exceeds 30% of your income and affects your standard of living, it is dangerous. You should avoid taking on debt such a large percentage of your income, as you would be seriously compromising your way of life.

If this analysis has helped you, remember that you can visit our other guides on managing your credit cards in our specialized section. Good luck!

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