Credit card balances reached a record high of $1.03 trillion at the end of the second quarter of 2023. According to one survey, 33% of Americans believe it will take more than two years to pay off their debt, which may not be surprising since as many as 14 million Americans have over $10,000 in credit card debt.^{1, 2}

Perhaps more shocking is that 40% haven’t been debt free since before 2018 and 15% have had debt since before 2006.³

When the average interest rate charged on credit card debt is over 24%, carrying balances can do enormous damage to future financial security.⁴

How Credit Card Issuers Charge Users

The interest rate assessed on unpaid balances will vary by issuer but is typically a stated fixed percentage above a benchmark rate, usually the prime rate. As interest rates rise, so do interest charges. Late fees may also be charged when the cardholder does not pay at least the minimum amount on or before the due date.

The interest rate charged by an issuer may vary depending upon the type of transaction. For example, cash advances or balance transfers may be assessed a different rate (e.g., 0% for six months).

If the balance isn’t paid before the following month, the cardholder will be paying interest on the accumulating interest since the monthly minimum payment required is often less than the monthly interest charged on the balance.

Sometimes an issuer will offer a promotion of a 0% interest rate with equal monthly payments over a specified period (e.g., 12 months). Under such programs, no interest will be charged on eligible purchases until the balance is paid in full. However, a late fee may be charged in instances where a payment is late or made in an amount less than the payment due. The issuer may also charge a promotional fee, assessed at the time of purchase.  Be cognizant of the fact that there are pros and cons of zero interest credit offers.

Escaping the Trap

It’s easy to fall into the trap of paying the minimum payment each month, but that will never eliminate the card’s balance, allowing interest charges to compound.  Take back control by understanding the psychology of credit cards.

Here are some ways to escape the debt trap:

• Pay the entire balance each month. If that’s not possible, pay more than the minimum payment amount.
• Take advantage of 0% balance transfer promotions and begin an aggressive pay down of that balance during the interest-free period … and do not use the reprieve to add more credit card debt.
• Pay as soon as possible; don’t wait for the due date since it will reduce daily interest charges.
• Pay everyday expenses with cash or debit card. Use the card only for big purchases.
• Find ways to cut spending.

Credit cards are a great way to build good credit history, which is important, but it can also ruin a person’s credit—something of which the individual will face many costly consequences for years to come.

Sources:

1. https://www.newyorkfed.org/newsevents/news/research/2023/20230808#:~:text=NEW%20YORK%E2%80%94The%20Federal%20Reserve,0.1%25)%20to%20%2417.06%20trillion
2. https://www.gobankingrates.com/credit-cards/advice/jaw-dropping-stats-about-state-of-credit-card-debt-in-america/
3. https://www.gobankingrates.com/credit-cards/advice/jaw-dropping-stats-about-state-of-credit-card-debt-in-america/
4. https://www.lendingtree.com/credit-cards/average-credit-card-interest-rate-in-america/

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