Updated: Nov 1, 2021
Credit cards can be extremely appealing to a lot of people. Card issuers are offering consumers larger sign-up bonuses than they ever have before. In addition, the ability to earn travel rewards or cash back on each purchase is hard to pass up.
The problem is that unless you are careful and responsible, you can get in over your head. You can start making purchases with money that you do not have. This is what can lead to extreme credit card debt. The average US household is carrying $2,700 worth of credit card debt and that number is only rising.
While this statistic is a little frightening, it’s not all that surprising. Over the past 13 years the total cost of living in the US has risen 29% while the growth of incomes has only risen 26%. That leaves the average American struggling to keep pace with how much things cost today.
Your credit card debt is costing you more than you think
If you are one of the millions that currently carry a credit card balance, you should know that your total balance might not be telling you the whole story.
Each month that you are rolling over a balance on your credit card, you are accruing finance charges. Depending on the size of your balance, this could mean thousands of dollars more that you are paying for what you might have thought were insignificant purchases.
One of the biggest mistakes that many people make is only making the minimum payment on their outstanding credit card balance. This is a very costly mistake and here is why:
Let’s assume that you have an outstanding balance of $4,800. Depending on the credit card issuer, the minimum payment would be around $100. If you were to just pay the minimum payment each month, it would take you nearly 18 years to pay your balance. It would also mean that your $4,800 balance would actually cost over $10,000 once you factor in interest each month.
Avoiding the Credit Card Debt Trap
No one wants to end up paying an additional $5,200 if they don’t need to. In order to avoid this, it’s important to pay off your credit card debt as quickly as possible. One of the easiest ways to do this is by moving your balance to a credit card that offers 0% interest for an introductory period of time.
There are quite a few cards that offer anywhere from 12 to 21 months of 0% interest. What this will do is give you time to pay off your debt without accruing any finance charges. If you choose to go the route of using a balance transfer card, then it’s important to have a plan in place so that you can pay off your balance before the promotional period expires. If you don’t, then you will be back to paying finance charges once again.
The Bottom Line
The next time you use your credit card, think about whether or not you are going to be able to pay off the charge before your payment due date. If you can’t, then finance charges will start accruing and what might have initially been a $20 purchase could quickly become much more expensive. Image Source - https://www.flickr.com/photos/59937401@N07/