In 2023, national credit card debt reached a staggering $1.115 trillion, with an average balance per American of $6,501. For some, this amount may be manageable, but for others, credit card debt represents a dark hole that’s difficult to climb out of. If you have credit card debt but aren’t sure if what you’re experiencing is “normal,” look out for these five signs that credit card debt may be holding you back from financial freedom:
1. You’re only making the minimum payment
Imagine you have a $500 balance on a credit card with a 24% interest rate (the current average interest rate, or APR). If you pay at least $15 per month, it will take you 4 years and 8 months to pay off your balance in full. However, you will have spent $332 in interest. If you increase your monthly payments to $25, your debt will be paid off in 2 years and 2 months, and you will have paid $145 in interest.
If you are only making the minimum monthly payments at best, you could quickly get financially out of control.
2. You`ve been denied credit
If you’ve already applied for a loan and been denied, it could be because of your credit utilization. Credit utilization refers to the amount of money you owe compared to the amount of credit you have access to. For example, let’s say you have a credit card with a credit limit of $1,000. If you owe $900 on the card, you only have access to $100. But if you only owe $100, you have access to $900. Generally, the better your credit score, the more likely a lender is to trust you and give you a loan.
What if your car breaks down at the last minute and you need a new one, or your water heater breaks down in the middle of winter?The less you already owe, the higher your credit score can be. Lenders don’t look at this and think, “Oh, good. This loan applicant doesn’t need our money.” Instead, they think, “Wow, look how carefully this loan applicant handles debt.”
3. You Can’t Save Money
Having an emergency savings account will minimize the chances of having to use your credit card for an emergency. If your credit card payments prevent you from saving money, they will do more harm than good.
Think of the interest you pay each month on credit card debt and imagine how much easier it would be to build an emergency fund if you had that money at your disposal.
4. Taking out a Cash Advance
If you take out a cash advance from your credit card, it’s important to know how high the interest rate on those funds will be. For example, as of June 1, 2024, the APR for purchases and balance transfers on the First Interstate Bank credit card was 19.50%. However, the APR for cash advances was 29.50%.
If your hard-to-use credit cards have created a hole, cash advances only make that hole deeper. If you’re taking out a cash advance, it’s time to get out of debt with a debt repayment plan.
5. Using one credit card to pay off another
If you find yourself robbing Peter to pay Paul, or in this case, using one credit card to pay off another credit card with a cash advance, that’s a sure sign it’s time to get a credit card. Your credit situation is under control. As mentioned earlier, the APR on a cash advance is higher than a purchase or balance transfer. If you can’t make payments on your credit card and have to cover it with a cash advance from another card, your financial well-being could be at risk.
There’s Hope
It’s easy to believe that your financial situation is worse than others. It’s easy to think there’s no way out. But nothing could be further from the truth. You won’t get rid of your credit card debt overnight, but millions of people have done it, and so can you.
Here are four ideas to get you started:
- Stop using credit cards. Credit cards are convenient as long as you don’t pay interest. Keep using debit cards and cash until you can pay your credit card bill in full every month.
- Pay a little each month. Every time you pay more on your credit card, you pay less interest.
- Transfer your balance. If your credit remains relatively good, you may be able to qualify for a credit card with a 0% introductory interest rate. Let’s say you get a card with a 0% introductory interest rate for 18 months. In this scenario, imagine you transfer $1,800 in high-interest debt. This means that within 18 months, you’ll be able to pay off the $1,800 without paying a cent in interest. If you pay off your debt before the introductory period ends, you won’t have to pay the regular annual interest rate.
- Find out about debt consolidation loans. Here’s how a debt consolidation loan works: You get a single loan with a lower interest rate than you’re currently paying on your credit cards With a consolidation loan, you make one fixed-rate payment each month instead of making payments to various lenders As long as you make all your payments in full and on time, you should be able to pay off your loan faster than with a credit card, and more importantly, save money.
Finally, if you need help getting started, nonprofits like the National Foundation for Credit Counseling (NFCC) can help. Through the NFCC, you can seek personalized advice from a certified credit counselor. Your advisor will work with you to learn more about your budget and financial goals. Once they have this information, your advisor will create a personalized financial action plan to help you reduce your credit card debt and get control of your finances.
It’s a positive thing to understand that credit cards stand between you and your financial wellness. After all, you have to know there’s a problem before you can tackle the solution. And no matter how hard it may feel, the solution is within reach.
