Evading and Escaping the Credit Card Trap

When used responsibly, credit cards can be very convenient and useful financial management tools. The various perks, including travel rewards, are hard to ignore; and the cash back rewards are truly free money! Credit cards also offer excellent security and protection against fraud. While debit cards also have measures in place to deal with fraudulent charges, the benefit of using a credit card is that you will not be fighting to get your own money back when a charge is disputed. Credit cards are also a powerful tool in building your credit score, which can save you money down the road with better rates and terms on future loans.

Some financial experts advocate for just cutting up your credit cards. It is certainly a challenge to get into credit card debt if you’ve cut them all up. This approach might not be for everyone, as oftentimes just paying them off in full every month is the preferred route. It is definitely a route, however, that takes discipline. If you find yourself tempted to overspend or not pay off the card in full every month, it is better to cut them up and avoid using them altogether.

When used responsibly, all of the benefits of credit card use can be accessed while paying zero dollars in fees and interest.

The Golden Rule: Never Carry a Balance

The minimum payment is the lowest amount you are required to pay in a given billing cycle. Failing to pay at least this amount could result in late fees or penalties and could lower your credit score. In almost all cases, the minimum payment does not cover the full balance of purchases for that billing cycle. Paying only the minimum results in the remainder of the outstanding balance being carried over to the next billing cycle, causing interest to accrue.

Life doesn’t always go as planned, and without an emergency fund in place, sometimes there are limited options for emergencies besides credit cards. In general, though, it is good practice to limit your spending only to what you can afford to pay off in full every month. Paying off the full balance every month requires discipline and restraint, but could save you thousands in interest payments and a whole lot of stress!

In general, it’s clear that many Americans are not following this rule. According to The American Bankers Association, 54% of all active credit cards carried a balance in the first quarter of 2021.

The Problem

The fundamental danger of credit card use is the staggeringly high interest rates. According to the Federal Reserve, for the third quarter of 2021, the average credit card interest rate for accounts accruing interest was 17.13% – a near all time high! Comparing that to the current average 30-year mortgage rate of 3.30% or the average rate on a new car loan at just 2.34% for borrowers with great credit, it becomes immediately clear why it is best to avoid credit card interest at all costs.

One of the keys to success in personal finance is investing into assets that produce income, where your money grows and compounds to build wealth. When it comes to debt, the opposite is true, with interest always working against you. You can continue to make payments every month and always be on time, but as the interest accrues, you end up spinning your wheels and making little progress. This happens in a major way when you are pushing against a 17.13% interest payment! Some borrowers consistently make only the minimum payments on their credit cards, which can result in higher interest payments and seriously extend the time it takes to pay down the balance.

Let’s say you have a credit card balance of $9,000 with an interest rate of 17%. Let’s assume that the minimum payment is determined by adding the interest charges plus 1% of the balance. The minimum payment would initially be around $218/month, which would decrease incrementally over time. Assuming no new charges were added to the credit card, and only the minimum payments were made every month, it would take over 27 years to be free from this debt! Over that period of time, you would have paid back the $9,000 balance along with over $12,190 in interest. Those are not good numbers!

The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the Credit CARD Act, requires that credit card companies provide this information on your statement, so you should be able to see how making only the minimum payments would impact your specific situation.

I’m already in Credit Card Debt! What Now?

If you are currently struggling with credit card debt and don’t already have a monthly budget, that should be your first step. Budgeting will help you understand your income and spending numbers and regain control of your financial situation. Work hard to stick to your budget so that at the end of each month any left over money can be thrown directly towards paying down your credit card balance.

Be sure to keep your emergency fund in place, but you’ll want to get creative during this process to find extra ways to save and make money. Cancel subscriptions. Find stuff around the house to sell online. Get a second job. Throw every penny you can at your debt. Attack it! Every dollar you can pay down will put you one step closer to escaping the trap and buying back your freedom.

This journey will not only help you escape your current credit card situation, but it will develop healthy financial habits and skills which will become a solid foundation for decades to come.

Life After Credit Card Debt

Don’t just settle into the habit of paying credit card interest. If you don’t currently have any credit card debt, great! Keep up the great work, stay disciplined, and vow to never carry a balance. If you are one of the millions of Americans currently carrying a credit card balance, do everything possible to aggressively pay it off. You work too hard for your money to continually hand it over to the credit card companies.

A 2021 survey by the National Endowment for Financial Education (NEFE) reported that 21% of Americans feel stressed out because of their credit card debt. Working hard to get out and stay out of debt will yield incredible results not only for your wallet but also for your health and your life.

Give us a call at (800) 642-2227 if you’d like to speak with one of our Financial Advocates about your credit card debt and get on the path to financial freedom.

Guest Post Written by Kyle Wagner