Never Overlook This Advice Amidst $1 Trillion Credit Card Debt
Credit card debt in the United States is at a record high. Learn what you can do to ensure it doesn't become a problem for you.
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Credit card debt is one of the most common financial issues, and it has been on the rise. Total U.S. credit card debt reached an all-time high of $1.13 trillion at the end of 2023, according to data gathered by The Motley Fool Ascent.
Many people have credit card debt, and it can take years or even decades to pay off. That's never a good thing, but especially not now, as interest rates have also skyrocketed. Here's advice you can follow to manage credit card spending and get out of debt.
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Spend what you can afford with your bank account, not your credit limit
The best credit card habit is to only charge what you can afford. To clarify, that's what you can afford with money you already have in your bank account. Don't use your credit limit as a guide to how much you can spend. Just because your card has a limit of $5,000 or $10,000 doesn't mean you should spend that much.
Basically, use your credit card like a debit card. If you want to get a $1,500 computer, but you have $1,000 in your bank account, don't buy it just because you could pay for it with your credit card.
There are a couple of reasons to manage your credit cards like this. It's an easy way to decide what you can and can't afford. Some people make purchases based on how much money they'll have when it's time to pay their credit card bill. Not only is this more complicated, it's a bad habit to spend money you don't have yet.
You'll also always be able to pay your credit card bill in full. This is extremely important, because it means you won't be charged interest on your purchases. If you carry a balance from month to month, that's when your card issuer can charge you interest. And credit card interest is expensive -- the average rate is 21.47%, according to the Federal Reserve.
If you have credit card debt, pay more than the minimum
The advice above works if you aren't carrying around a balance on your credit card. But what if you're in credit card debt right now? In this case, the most important step you can take is paying more than the minimum.
The minimum payment amount on a credit card keeps you current on the bill, but that's about all it does. For many card issuers, the minimum payment amount is interest charges plus 1% of your balance. And when you're paying that little, it takes a very long time to get out of debt.
Let's say your credit card balance is right at the average: $6,501. Your card has a 21% APR, and you make minimum payments every month. It will take you 305 months to get out of debt, and you'll pay $10,751 in interest. And that's assuming you don't charge anything else to your credit card.
Decide on an amount you can afford to pay every month toward your credit card debt. Make sure it's more than the minimum, and ideally, pay as much as you can. By paying more, you can potentially get out of debt years earlier. If you have good credit, you may also want to look into balance transfer credit cards. These have a 0% intro APR on balance transfers, so they give you some time to pay down debt interest-free.
Getting the most out of your credit card
While credit card debt is a common issue, that doesn't mean it needs to be an issue for you. If you're careful about how much you spend, you can take advantage of the benefits that credit cards offer without incurring the drawbacks.
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