How much credit is too much credit?

Credit is an important part of your personal finances and allows you to get the things you need such as a college education, a home or a dependable car. Credit cards themselves offer conveniences that cash and checks do not. Because so much credit is available and because it is used so frequently by many, you may be wondering how much credit is too much credit.

The amount of credit that is right for you depends specifically on your unique situation. Some lines of credit are more important and helpful in the long run than others. Student loans and mortgages are types of credit that should offer dividends in the future, whereas credit cards can get you into trouble quickly if they are not handled responsibly.

Signs You Are Using Too Much Credit

When you begin using too much of your credit, there will be some obvious signs. There are ways to calculate when you are using too much credit, which will give you some tangible numbers to consider. That will be talked about later. First though, here are some general signs that you are using too much credit.

You are late on loan payments and bills regularly.
You have more than a couple of overdraft charges or bounced checks.
You have missed payments on your loans and credit cards recently.
You pay only the minimum on your credit cards each month.
You get additional lines of credit to help pay off older lines of credit.
Your credit card balances do not go down each month.
You have to pay expenses such as groceries, gas and sometimes even utility bills with your credit card.
You can’t put away any money for savings or for an emergency fund.

You don’t have to have all of these problems to be too far into debt, but if your financial situation mirrors a few of the symptoms above, then you are using too much credit.

How To Calculate If You Have Too Much Credit

If you are looking for a more concrete number to tell yourself whether or not you are using too much credit, then you can calculate your debt to income ration. Calculating your debt to income ratio is not very difficult, but there are a few things you must keep in mind while calculating. Everyone’s situation is just a little different and so you may be able to handle more debt than someone else because you have less expenses or the reverse may be true. Also, when calculating your debt, do not consider your mortgage or rent, this is considered more of an expense even if it is a mortgage. A mortgage is generally a good investment and as long as you are not upside down in your house or you do not have too high of an interest rate, you don’t really need to consider it debt.

To begin with, you need to write down all of your credit lines and accounts except your mortgage. Make sure to include any of the following if they pertain to you.

Car Loans
Credit Cards
Personal Loans
Retail Store Accounts
Student Loans

If you have any other type of loan or credit line in which monthly payments must be made, you should write those down as well. This does not include bills, such as electric, cable, water, phone, etc.

The next step is to write down how much you pay per month for each of these loans or credit lines. Be careful with your credit cards. Don’t put down the minimum payment even if you are only paying the minimum each month. You should put down the amount per month you need to pay in order to pay off your credit card balance in 1 year. This will give you a better idea of how much debt you have and if it is too much.

Once you have each loan’s monthly payment figured out, you need to add them up to get the amount of money you spend each month on your credit cards and loans. You then need to figure out your monthly take home pay. You then divide your debt per month by your take home income per month to get your debt percentage.

Now take that percentage and see where it fall on the following scale.

10 %: Excellent—your goal is to get your debt to 10 percent of your take home income.
11-1 5%: Pretty Good—you have your debt under control and are probably putting away money for a rainy day. Still, you should be trying to find ways to cut your debt down to the goal of 10 percent.
16-20 %: Getting Dangerous—you have too much debt for your income. You are not in a bad situation yet, but you are on the verge. It may be time to consider some credit counseling, or at the very least a re-thinking of your personal finances.
21-25 %: Bad—after you pay your mortgage or rent you are barely sliding by each month. You may even have to charge things like groceries to get by each month.
26 + %: Very Bad—bankruptcy could be in your future if you don’t make some drastic changes. The National Foundation for Credit Counseling (1-800-388-2227) may be able to help you, and they are a reputable organization.

Credit Card Credit

Though credit cards are convenient and offer protection for you purchases and fraud protection, it is easy to get carried away with them. Credit card debt is the easiest type of debt to use irresponsibly. It is also be easy to end up with 8 or 10 credit cards when you count your store credit cards as well as your Visa, American Express and MasterCard credit cards.

It is generally advisable for you to have 2 to 5 credit cards including those credit cards from retail establishments such as Home Depot or Macy’s. Though the line of credit available is more important than the actual number of cards, you can lower your credit score by having too many credit cards open. Also, when creditors see that a credit card is nearly maxed out, they get a little nervous. It is a good idea to keep at least half of your credit limit open on your credit cards. A $2,000 credit limit on a credit card should have $1,000 remaining in available credit.

A little knowledge and a lot of self-discipline are necessary to keep your personal finances healthy and your credit under control.