Credit Card Debt
Credit cards are a financial tool that can quickly become a financial burden. It’s estimated Americans carry a grand total of $900 billion in credit card debt. This means 44 percent of families hold some amount of revolving credit card debit, with the average household carrying a balance of $15,654.
These days, nearly anyone can get a credit card. Teenagers under 18 can be added to their parents’ cards, and once they turn 18, the credit card offers roll in faster and easier than college applications. Studies found 67 percent of 18- to 24-year-olds use credit cards, and the numbers only go up from there:
- 83% of 25- to 34-year-olds (nearly half have three or more credit cards)
- 76% of 35- to 49-year-olds
- 78% of those 50 and older
Looking past the numbers, we learn how and why credit cards become a burden of debt. It has to do with the economy, unexpected life events, and sometimes less than admirable spending habits.
Why are people spending money they don’t have?
Credit cards allow you to pay for items or services you don’t have the cash for right now with the understanding that if you don’t pay off the balance by the next billing cycle, you’ll begin to pay interest. What people are charging to their credit cards, though, might surprise you—it isn’t just flat-screen TVs and luxury vacations.
Many Americans are putting medical expenses not covered by health insurance [AR1] on credit cards. But there are other options, like asking the doctor or hospital if they have an interest-free payment plan. This can be a good compromise if you don’t have the insurance coverage or cash now but also don’t want to be stuck paying the high interest rates of most credit cards.
Credit cards are also used for everyday necessities during periods of unemployment if a savings account hasn’t been built up or has been depleted. For some, not all necessities—like new clothes for kids, utility bills, or gas for the family car—are covered by a low-paying job, so they go on a credit card.
Credit card debt can easily pile up, even if your income is good, by living beyond your means and overspending on non-necessities. Pretty soon, you can only afford to make minimum payments and end up paying thousands of dollars in interest—much more than the original cost of the items charged to the card. If spending isn’t curbed, lifestyle adjusted, and a spending budget established, missed payments lead to a lowered credit score, a dangerous cycle of transferring balances between cards, and possibly bankruptcy.
Regardless of why and how credit card debt is accumulated, paying it off comes at a cost of forgoing other opportunities, including saving for emergencies, paying off other debt, saving for a house or retirement.
Paying Off Credit Card Debt
Paying off card debt should be a priority when considering which kinds of debt to tackle first. And a repayment plan doesn’t need to be complicated!
Repayment plan in four easy steps:
- Limit spending to basic needs to free up cash to pay down the debt. Use a personal budget [AR2] to track spending and determine what is a necessity and what is a comfort.
- Call your credit cards and ask them to reduce your cards’ interest rates.
- Pay the minimum amount on each card, but prioritize extra payments to pay off high-interest balances first. This ensures you don’t harm your credit score with missed payments. Repeat this process as each card is paid off.
- Stop using your cards while paying off the debt. Use a debit card or cash, instead.
There are other ways to decrease the amount of interest paid while working to eliminate debt. Make payments (even very small ones) more frequently than the required once a month. This keeps your average daily balance down, so interest is accrued on a smaller balance each time a bill comes due. You can also consolidate credit card debt onto a card with 0% introductory APR and no fee for balance transfers. This way, you can be paying off the debt before the introductory period ends (usually 12-18 months) and the new interest rate kicks in.
If you cancel a credit card, it will hurt your credit score. Instead of canceling paid-off cards, pick which ones you want to use (based on a low interest rate and usable perks like cash back) and then simply stop using the others and don’t renew them when the company sends you a new card.
Maintaining high balances on credit cards also hurts your overall credit score. To raise your score while using credit cards, the total balance across all cards should be under 35% of your available credit limit. And remember, on-time payments are key to a healthy credit score!
There are ways to use credit cards as beneficial financial tools (and not just as a shovel to bury yourself in debt!). Credit cards help you establish and build credit among financers, allowing you to take out larger loans to pay for a car or a home. Choose a card with a low interest rate and benefits you’ll actually use—like discounts at stores you already shop at, or cash back options. If you have questions about building good credit or overcoming credit card debt, your local credit union can help.