Credit cards can be a helpful tool if used correctly. Many people find themselves distressed in high-interest credit card payment snowballs that cause them significant harm. This can happen for a variety of reasons, such as overspending, making only the minimum payment, or experiencing a financial emergency.
This article will cover:
- What credit card debt is
- Why credit card debt is so bad
- How to avoid credit card debt
What Is Credit Card Debt?
Credit card debt is the money you owe to your credit card company. This debt can happen if you charge more on your card than you can afford to pay back, or if you only make the minimum payment each month.
If you don’t pay your credit card bill in full every month, you’ll likely be charged interest on the outstanding balance. This means that you’ll end up paying significantly more for whatever you purchased with your credit card than if you had paid with cash or a debit card.
If you want to learn more about debt and how it works, check out our article – How Debt Works.
Why Credit Card Debt Is So Bad
Credit card debt is dangerous because of the high interest rates that will compound over time.
The Federal Reserve monitors the average interest rate that U.S. consumers pay for a variety of different financial products—credit cards included. In May 2022, the average credit card interest rate (APR) in the United States on accounts with balances that assessed interest was 16.65%. This means that the average college degree holder who has roughly $8,000 in credit card debt is charged over $111 per month in interest alone. The $1,332 annual interest fee in this example, adds to the total debt owed to the credit card company. Even if you pay the $1,332, you will not be reducing the total debt of $8,000 owed.
To put the high interest fee in perspective, if a monthly $111 interest fee were invested at 10% for 40 years instead of paying interest, it would be worth $621,000. Imagine that your retirement account would be over half a million dollars greater, just by avoiding credit card debt.
Compound interest has the power to hurt you or help you greatly. Don’t let credit cards get the best of you with a high interest compounding debt snowball.
How To Avoid Credit Card Debt
Credit cards can be scary, but if used wisely, they can be extremely powerful tools to build your financial future. Credit cards have the power to protect your finances with theft protection, provide you with rewards like miles and cashback, and even increase your credit score, which will make it easier to get lower interest loans for a future home purchase.
There are two easy ways to avoid credit card debt.
1. Treat Credit Cards Like Cash.
Credit card debt only happens when you spend more than you can pay back at the end of the month. If you create a simple budget, you can easily see how much cash you have to spend each month to keep from going over your limit. Learn more by reading the Traditional Budgeting Doesn’t Work article.
2. Always Pay Your Full Balance.
An easy way to end up in credit card debt is to not make any monthly payment on your card balance or to only pay the minimum balance. It is common for people to miss a payment date by mistake and incur interest and fee charges. You can avoid this problem by having an automatic payment set up for your account.
Most cards will also allow you to set up scheduled payments for the full balance of the card. By doing this you can ensure that you never carry a balance.Â
It’s That Simple
Credit cards are a very powerful double sided sword. They have the power to protect you, provide you with rewards, and boost your credit score. They also have the power to destroy your finances. As long as you treat your card like cash, don’t overspend, and pay the full balance each month, you can avoid credit card debt and reap the benefits.
If you want to understand more about the importance of personal finance management, check out our article – Why Personal Financial Management Matters.
