Credit cards can help you live life on Cloud-9 — a swipe here, a tap there and boom, you have everything you could ever need. It isn’t until your monthly bill rolls in that you are hit with a major reality check. It all depends on how you use them and handle the debt. Yes debt, because your credit limit is borrowed money.
Keep reading to learn the dangers of credit card debt, how to avoid them, and how to recover if you’ve gotten yourself in a sticky situation (it happens to the best of us)!
What is Credit Card Debt?
Credit card debt is whatever you don’t pay back on your credit card card each month. It could be as high as thousands of dollars or as low as five bucks and it happens when you carry a balance instead of paying off your credit card every month.
Carrying a balance isn’t inherently bad—as long as you have a game plan. Credit card companies will make money off your debt by charging you interest so long as you carry a balance, but if you have a plan to pay them back or intentionally put a purchase on your credit card so you could pay it off in installments, then you’re not in the danger zone.
Credit card debt gets dangerous when it gets out of hand and it’s clear you’re living beyond your means with little to no plan of how to pay the credit card company back. That’s when credit card debt can take on a life of its own, and even affect your own well being. That’s right, being in debt can cause you a lot of stress so we recommend you try and avoid it if you can.
What are the Typical Credit Card Traps?
Using credit cards irresponsibly can quickly lead to spending way too much, often on things you don’t really need so you can impress people around you or your followers online. Because the money you spend on your credit card isn’t coming out of your bank account immediately, it stings less to purchase things. But, just like that college paper you left until the night before it comes back to bite.
Compounding Interest Makes It Hard to Pay Off the Card
Fact: your credit card company is going to charge you interest on your credit card balance. And credit cards have some of the highest interest rates out there (higher than what you’ll typically see for a car or home loan).
Whoever gave you your credit card is probably using compound interest to figure out what they’ll charge you for the money they loaned you. So your monthly interest rate is based on the average daily balance on your credit card and an interest rate that compounds or multiples daily (per your specific cards terms and conditions).
So, you went shopping last month and spent $3,000 on your new credit card that has a 20% APR (annual percentage rate) on purchases that compounds daily and you get your credit card bill every 31 days.
That’s a lot of numbers, let’s break down how interest is impacting your credit card balance.
Credit Card Interest Calculator
First, divide your 20% APR by days in a year
0.20/365 = which 0.00054795 is your daily interest rate
Second, multiply that number by your average daily balance
0.00054795 x $3,000 = 1.64383562
Third, Multiply by the number of days in your billing cycle to get your monthly interest payment.
1.64383562 x 31 = 50.95
At the beginning of the following month, your balance would be $3050.95. If you only pay the minimum payment of $25, your balance is going to rise slowly over time because you aren’t paying more than what you’re being charged in interest. If you pay more than the interest rate each month, then your balance will go down.
Your monthly payments aren’t going to the actual amount of money you first borrowed (the principal) until the interest is paid. So, you have to pay more than the minimum and more than your interest rate each month if you want to pay off your debt.
Ruining Your Credit Score
If you get too deep into credit card debt and aren’t able to make your monthly payments or pay them more than 30-days late, then you’ll ruin your payment history and damage your credit score in the process.
Harder to Track Your Spending
Using too many credit cards can make it hard to keep up with your budget. Tracking your spending is key to your financial wellness. How can you achieve your financial goals if you don’t know what’s coming in and going out of your accounts? Having to pull up so many different credit card accounts is going to make budgeting difficult which means you’ll be less likely to do it.
How To Pay Off Credit Card Debt?
Realized carrying that balance isn’t good for you and that ignoring it won’t make it go away? Ready to focus on paying off your credit card debt so you can be or take steps to being debt free? Here are 3 ways to get rid of credit card debt.
Focus on One Debt at a Time
If you have a balance on multiple credit cards, focus on paying one of them off first. Keep making the minimum payments on all of your other cards so you don’t mess up your payment history, and then throw all of the money you can at the balance you’re focusing on first.
How do you choose which debt to pay first? Figure out what will be more motivating for you! Will you be pumped up to keep going if you pay off the card with the highest interest rate first or if you pay off a smaller debt first?
Either way works, as long as it works for you and you’ll stick with it.
Pay More Than the Minimum
Do what you can to pay more than the minimum balance on your cards every month. Even one dollar more than the minimum payment will help you pay off your balance sooner and pay less in interest.
Pool Your Debts
It might make sense to combine your debts by moving them from one lender to another. Just make sure you watch out for balance transfer fees. This can be especially helpful if it gets you a lower interest rate on your balances which will save you money in the long run.
Like we said, credit cards can be a blessing or a curse. It all depends on how you use them. Thankfully, credit cards aren’t the only way to build credit anymore.
Extra can help you build credit responsibly and avoid the dangers of credit card debt all together.