Debt is a part of life. In a lot of ways it’s a necessary evil (that’s only really evil when it gets out of hand). It’s probably pretty easy to tell when you have too much debt, but is there such a thing as a “normal” amount of debt?
Average vs. “normal”
The average adult consumer in the United States is carrying a credit card balance of over $6,200. So does that make $6,200 a normal amount? Not really.
The truth is that that average represents an incredibly wide range of consumers. Some folks carry significantly more debt. Some carry no debt at all.
How much debt you can or should carry is dependent on your income and ability to repay. Netflix is almost $15 billion in debt. They don’t seem overly concerned about that, though, because that’s part of their growth strategy and they have the projected revenue to make it work. If you were $15 billion in debt, however, that would not be good. That would be quite bad actually. But the point still stands - the amount of credit card you're currently carrying only really matters in the wider picture of your personal finances.
Can you support your credit card debt?
Rather than comparing your debts to anyone else, you're much better off asking yourself how much credit card debt you can actually afford. Because there's only so much money to go around each month, it's important to make sure that your debt payments aren't crowding out your other essential needs.
Debt-to-income ratio isn't a perfect measurement, but it's a helpful tool when trying to understand your current relationship with debt. Simply put, it measures the amount of your income that goes toward debt payments. You can use this debt-to-income calculator to find your ratio. The higher the number, the larger a percent of your money is going to debt repayment. There's no "bad" ratio, exactly, but as you drift closer to 40% and above you may find that lenders especially consider you to be risky and may not be willing to extend you additional credit.
Is Your Debt Healthy?
So the question isn’t really, “What’s a normal amount of credit card debt to carry?” It’s “What’s a healthy for me amount to carry?” To know that, you first have to answer these three questions:
Are you meeting your obligations?
As soon as your debt becomes too large to comfortably manage, it’s no longer healthy. Your ability to make your monthly minimum payment doesn't mean you shouldn't worry about that debt, but it does that your credit card debts (at least for the time being) fit into your overall budget.
Is the debt in service to your goals?
Businesses and entrepreneurs carry debt because “you have to spend money to make money”. Mortgage debt and student loan debt are often necessary if you want to own a house or get a college degree. Credit card debt – while far from ideal – can be healthy, as long as it’s a part of your plan.
At the same time, putting an expensive car repair bill on your credit card may not be part of your plan, but it is in service to your most pressing needs and goals. It gets you back on the road and potentially back to work.
Are you making progress repaying that debt?
Because most credit card debts cost you money every month in interest charges, it's always in your best interest to get those balances down as quickly as you can manage. Do you have a plan? Are you making progress? If your debts are staying stagnant or moving in the wrong direction, you may need to make debt repayment a priority.
If you can’t quite keep up because of your debt, or if the debt isn’t “helpful” in some way, then it’s not a healthy or normal debt and you should consider taking steps to repay that debt as quickly as possible. If you need help putting together a repayment plan or a revamped budget, consider speaking with one of our certified debt and budget counselors!
Article updated July 2020