By 2017, credit card debt in America amounted to more than $1.023 trillion. This number is divided up among 126 million US households and accounts for 26.7% of total US consumer debt.¹
People with credit card debts had average balances of $3,137 while the average household debt is just over $8,000.² However, for households that carry debt, the average debt balance was higher at $15,654.³ Furthermore, households that carry a balance are paying an average of $904 in interest each year. This means that on average close to $1000 of what people are paying each year towards credit card debt is not even going towards the principal balance but towards fees.
It’s not always a bad thing
Borrowing money is not always a bad thing. When you are diligent in paying off your debts, you get to build up your credit score, which will eventually help you get credit when you need it in the future. Credit card debt only becomes bad and damaging when you borrow more than what you can afford to pay back. However, when you use credit cards sensibly they can be a very good thing. For example, carrying credit cards is certainly easier than carrying a wad of cash. You could use a credit card to buy a big-ticket item when you don’t have the money in your wallet or not enough cash in your checking account. Credit cards can be very helpful in the event of an emergency. They can also be useful tools for budgeting as the receipts you get when using your credit cards can make it easier for you to track your spending. And if your cards were stolen or you were the victim of identity theft your financial responsibility would probably be limited to $50.
The black hole of credit card debt
The problem with credit cards is that it’s easy to abuse them. That is what makes them a very popular sinkhole. Many Americans continue to use their cards without thinking about how they will pay their balances. The appeal of instant gratification, of getting stuff they want immediately and without having to pay at the time, can be a tempting scenario for many shoppers.
Credit card companies are amazingly skilled at wooing cardholders to continue spending whether or not they have the ability off the debt that they are acquiring. This comes in the form of low-interest promotional periods and 0% interest balance transfer cards where interest rates can skyrocket once promotional periods end. The credit card issuers also have tempting offers designed to get people to spend even more by offering cash back, points and airline miles. The problem is that most people fail to do the necessary math to see how much these perks are weighed in favor of the credit card companies. As an example of this it might be tempting to sign up for a card that offers 2% cash back but do the math.
This is basically two cents on the dollar meaning you would be required to spend $1000 to earn just $20. It gets even worse if you were to fail to pay off that $1000 balance at 15% interest as this would totally wipe out the $20 you earned in cash back using the card.
The credit card debt scenario
It is very easy to get into this kind of debt but you cannot always blame it on irresponsible consumer spending. Sometimes, people don’t have a choice. Just imagine a family unable to pay for its groceries in cash because dad lost his job in the recent recession. These families are often forced into paying for their basic expenses with those little plastic cards. When a person encounters a medical emergency and payday is still a week off, credit cards are used as a fallback. When the choice is between surviving and debt, most people will choose the latter.
The danger signs of credit card debt
You may think that you are handling your credit cards responsibly but truth be told, this may not be the case at all. Here are the danger signs to watch out for that you’re beginning to have a serious problem with your credit card debts.
- You’ve maxed out the credit limit on most of your cards
- You are able to make only the minimum payment required on your cards
- You almost always spend more than you earn each month
- You’re not sure what might be on your credit reports or how much you actually owe
- You are forced to miss payments on some of your bills in order to pay others
- You’re using cash advances on one credit card to make the payments on others
- You’ve been forced to use credit cards to make day-to-day purchases such as movie tickets, groceries or fast food
- You and your spouse or partner constantly argue about money
- You recently applied for new credit or a loan and were turned down
- When you run into an unexpected expense such as an auto repair you typically panic
- You are receiving calls from creditors regarding overdue bills
- You think you may be forced to file for bankruptcy
What not to do with credit card debt
If you find yourself laboring under a huge load of credit card bills, do not despair. There are programs and companies that exist that could help you recover. You have a lot of options to choose from but the most important thing is to understand your current situation. But you also need to know your options and what your next step should be. Plus, you need to understand what not to do with your credit card debt.
First of all, don’t just do nothing. That is the worst thing you could do. It’s critical that you not ignore those credit card bills because if you do the interest will keep compounding and you will sink deeper and deeper into debt. As an example of this if you owed $10,000 on your credit cards at an average interest rate of 15% with a minimum payment of $225 a month it would take you 335 months to pay off the $10,000 and it would cost you $11,979.29 just in interest or more than the amount you had borrowed.
Another thing that you should not do – at least if you do not have to –is filing for bankruptcy. There are instances where declaring that you are broke would be your only way out of debt. However, even filing for bankruptcy will not relieve you of all your debt obligations. The most popular type of bankruptcy for people overcome with debt is called a chapter 7. It will wipe out credit card debts and other types of unsecured debts including medical expenses, personal loans, installment loans, department store credit cards, gas cards, cell phone bills and veterinarian bills in excess of $500. However, it will not discharge or eliminate secured debts including your mortgage or automobile loan as well as child support, back taxes, spousal support, NSF (not sufficient funds) checks, car repair bills and insurance policies.
Two ways to pay off credit card debts
If you are generally committed to the idea of getting rid of your credit card debts their are two methods available. One is called snowballing your debts and the other is called debt stacking.
The financial expert Dave Ramsey invented the snowball method. The way it works is that you order your credit card debts from the one with the lowest balance down to the one with the highest. You then focus all of your efforts on paying off that card with the lowest balance, which will go fairly quickly. Of course, you will want to continue making at least the minimum payments on the other cards. When you get that first card paid off you’ll now have extra money available to begin paying off the card with the second lowest balance and so on. Dave calls this the snowball method because as you pay off each debt you gain energy and momentum to pay off the next – just like a snowball rolling downhill picks up momentum. Here is an example of how this method works. Let’s suppose you have the following debts
- $$10,000 student loan ($96 payment)
- $500 medical bill ($50 payment)
- $7,000 car loan ($135 payment)
- $2,500 credit card debt ($63 payment)
If you were able to find an extra $500 a month like maybe by taking on a second job and use the money to pay off that $550 medical bill it would be gone in a month. You would now have $550 available to use to pay down the credit card debt. You’ll actually be able to pay $613 on it (the $550 you freed up plus your $63 minimum payment. This means you’ll be able to say goodbye to that credit card debt in about four months.
Next comes the automobile debt. You’ll now have $748 a month to pay on it. This means in 10 months that auto loan will fade off into the sunset. What’s left is the student loan debt. But now you have a total of $844 a month to put against it. This means in about a year it will be gone. Add it up and you’ll see that thanks to the hard work you put into this you will have paid off $20,000 in debt in just 27 months.
The debt stacking method for paying off debt is the opposite of the snowball method because it requires that you order your credit card debts from the one with the highest interest rate down to the one with the lowest. You then do everything you can to pay off the card with the highest interest rate. The thinking behind the stacking method is that it will save you the most money. However, it takes a lot of discipline to keep chipping away at a high interest credit card debt as it can take what feels like forever to pay one off especially if it has a high balance.
If you want out of your debt problems you might need the help of an expert. We encourage you to talk with us so that we can plan your way out of your financial crisis. National Debt Relief specializes in debt settlement and we can help you achieve a payment plan that could have you be completely debt-free in just 24 to 48 months.