Did you know the average American household carries $6,358 in credit card debt?
If that isn’t alarming, consider this: A debt of $5,000 with an average interest rate of 24.99% where only the monthly minimum payment is made can accumulate $4,823 in interest over five years. That means you’ll pay almost double the amount you originally spent on the purchase!
Let’s take a look at credit card usage to learn how to stay out of credit card debt.
The minimum payment mindset
Most people get trapped in credit card debt by making minimum payments. You use your card for a purchase you can not afford or want to defer payment, and then you make only the minimum payment that month. Soon, you are in the habit of using your card to purchase things beyond your budget. Since you are making only the minimum monthly payment, it won’t seem to matter much if your credit card balance gets a bit larger.
When you are trapped into making minimum payments on your credit card, your balance barely budges. A minimum monthly payment on a $5,000 debt generally amounts to $150. But, only $47.30 of that goes toward the principal of your debt. The rest goes toward interest.
Credit scores and prolonged debt
Typically, the more of your available credit you use, the lower your score will be. If you’ve fallen into the minimum payment trap, there is a good chance you are using most of your available credit and hurting your score.
Another important part of your credit score is the trajectory of your debt. If you are barely making progress on your balance, it will bring down your credit score.
A low credit score can make you ineligible for a mortgage, auto loan or employment opportunity. At best, it will result in higher rate if approved, which means paying more in interest.
Should I throw out my credit cards?
Keep some accounts open and active to maintain a healthy credit score; however, use your cards responsibly.
First, be careful to avoid the minimum payment trap. Live within your means and stay clear of mounting credit card debt. Before using your card, ask yourself if it is worth paying double its price in interest and possibly harming your financial health.
Second, if you are carrying a large credit card balance, work on paying more than the minimum due.
Third, use your credit cards for non-discretionary payments. This way, you’ll be keeping your accounts active without running the risk of overspending. Remember to pay your bill on time to avoid interest. Set up auto payments where you can to make sure you never miss a payment.
Finally, consider switching to a lower-interest rate card. While the current rate on a typical card is 24.99%, a credit card at your local credit union could be much lower. Also explore the option of taking out a personal loan with a lower interest rate and paying all your consumer debt off at once.