Important Lessons on Credit Card Debt
One of the biggest contributors to debt are personal credit cards. Don’t get me wrong…when used correctly, credit cards are an amazing way to build your credit profile. Credit cards offer convenience and flexibility, and rewards like cash back. They also make it possible to afford large purchases when you don’t necessarily have the cash on hand. Throughout a one-month billing cycle, you can use your card to make purchases up to a certain credit limit. When you pay your bill in full, your balance resets to zero and you can charge up to the limit again.
Credit cards also give you the option to pay off your balance over time while still using your card. This flexibility to “kick the can down the road” on debt is also how most people get themselves into trouble.
When I was 16, I got my first credit card. Nowadays, most card companies won’t extend credit to anyone under the age of 18 without parental consent. But hey it was 16 back in the 90’s when most companies were more liberal about who they gave debt too.
I remember I wanted to get my then high school girlfriend a nice gift. I had wandered into a Ben Bridge jewelry store and was “talked into” getting a Ben Bridge store credit card. “Make minimum payments” and “you will be approved for an amount you can use over and over again” we’re the reasons why I thought this was a great idea. Without being taught what was right beforehand, I ended up not making any payments on the card. It wasn’t until well into college when I applied for a private student loan when I found out this Ben Bridge card had lowered my credit score to where I could not qualify for any new debt.
How People Get Into Credit Card Debt
If you don’t pay your bill in full, you begin to carry a balance that is charged interest. This is exactly what I did to get into credit card debt. People develop a habit of literally spending more each month than they can afford to pay back, and they’re charged a high interest rate on the balance they still owe.
The way I learned to stay out of credit card debt is to first avoid charging more than you know you can pay back each month. Then make sure you pay your bill on time and in full. But for those that bit off more than they could chew, that’s not possible.
How can you still stay in good standing with your credit card company if you can’t afford your bill?
Credit cards allow you to make a minimum monthly payment each billing cycle. It’s usually the greater of a flat fee or, for larger balances, a small percentage of the balance (around 1 to 2 percent).
You must pay at least the minimum to avoid late fees, an interest rate increase, and damage to your credit score. If you do nothing else to pay down your credit card balance, you should at least make minimum payments to remain in good standing.
Most companies will allow you to have from the end of the billing cycle until the due date to pay. This is called the grace period. Paying the minimum will trap you into a cycle of credit card debt.
Here’s an example of how that happens:
Over the course of a month, you charge $1,000 to your brand-new credit card, which has a $2,500 limit and charges a 16 percent APR (average rate).
Your credit card issuer charges the greater of $25 or 1% of your balance, so in your case they charge $25.
The bill arrives and you can only afford the minimum payment right now.
You now owe $975 plus interest and can charge up to $1,525 over the next billing cycle (your credit limit minus the balance you are carrying over from last month).
If you kept making $25 payments, it would take you over two years pay off the balance, and you’d spend money on interest payments on top of the original $1,000 owed.
Because your credit score is partially determined based on the total balances you owe, getting into credit card debt will lower your score. Over time, this will make it more difficult to do things like, take out a loan, rent a home, or even get a job.
How to Get Out of Credit Card Debt Faster
If you’re in credit card debt, the first thing you need to do is STOP using your card. Stop spending more money than you have. Carefully budget and use only cash to pay for your monthly expenses. Put any money you free up toward your debt. Using your tax refund or a bonus from work, will help you get out of debt faster, too.
What if You Can’t Afford Your Credit Card Payments?
If you can’t even afford the minimum payment, ignoring your credit cards bills will not make your problem disappear. On the contrary, you’ll incur late fees, reduce your credit score, and increase your interest rate — and that’s before you get calls from debt collectors.
Call your credit card company and explain your situation. If you show them that you’re serious about paying them back, they may be able to help you by allowing you to make lower payments.
Need More Help With Your Credit Card Debt?
There are resources available if you need help getting and staying out of credit card debt. Take care to avoid debt relief and credit repair scams.
Don’t work with any company who:
Will charge you a large up-front fee
Will charge you to get your interest rate reduced
Claims it can remove accurate negative information from your credit report
Wants you to dispute accurate information on your credit report
Won’t explain the rights you have to contact credit reporting agencies for free
Informs you not to contact credit reporting agencies
For more information on credit repair scams and how to avoid them visit: https://www.consumer.ftc.gov/articles/0225-credit-repair-scams