8 Things That Contribute to Credit Card Debt — and How To Avoid Them
Written by
John Csiszar
Edited by
Jenna Klaverweiden
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Credit cards can be useful tools, but they can also lead to financial ruin. According to the Federal Reserve, the average rate paid on credit card accounts that were assessed interest is 22.83%. At that enormous interest rate, even small amounts of debt can rapidly spiral out of control.
This is why it’s so important to understand what actually drives credit card debt, and what you can do to avoid it. Here are eight common contributors to credit card debt, along with strategies to counter them.
1. Carrying a Balance Month to Month
Credit cards offer a convenient way to pay for your purchases, but if you carry a balance every month, you’ll be assessed interest. At rates of 20%-plus on average, you could end up paying more in interest than the amount of your original purchase if you continue carrying a balance.
How to avoid it: Always pay your full statement balance every month. Set a reminder on your phone or calendar so that you don’t overlook the payment date. At the very least, pay more than the minimum balance due so that you can minimize the effect of compounding credit card interest.
2. Relying On Credit for Everyday Expenses
While you can often get cash back or rewards for using credit cards for daily purchases, any benefit you receive will be more than offset by the interest you pay if you carry a balance. Use a credit card for things like gas, utilities and groceries only if you already have cash set aside in your bank account to pay your bills.
How to avoid it: Don’t fall into the trap of casually using credit cards to pay for everything. Remember, credit cards are a payment method, not a borrowing tool. One good trick is to immediately transfer money from your checking account to pay off your everyday charges — don’t wait for your monthly statement.
3. Minimum Payments Giving a False Sense of Progress
Credit card companies entice you to carry balances by offering a minimum payment option every month. Many Americans feel like they are “paying what they have to” by making the minimum payment. But the reality is that minimum payment amounts are purposely designed to barely reduce principal while maximizing interest costs.
How to avoid it: Pretend the minimum payment option doesn’t even exist. Pay off as much of your balance as you can whenever you receive your statement.
4. Seeing a Credit Line as an Income Boost
Credit cards often give a sense of financial freedom that doesn’t actually exist. Many Americans fall into the trap of thinking that a card with a credit line of $5,000 means they have an extra $5,000 to spend, free of charge. That’s the type of thinking that almost guarantees lifelong credit card debt.
How to avoid it: Never think of a credit card as an extra paycheck. Remember that a credit card is debt, not income.
5. Rewards Cards Encouraging Overspending
Earning cash back, miles or points from credit card spending can become an addiction all its own. It’s far too easy to boost spending in an effort to achieve more rewards — and the credit card companies know this.
How to avoid it: Unless you can pay your balances in full every month, you’ll end up losing more in interest than you gain in rewards. Use rewards cards only for purchases you were already planning to make, with money you already have in the bank.
6. Emergency Expenses Without a Safety Net
Credit cards often stand in for emergency funds for cash-strapped Americans. Unfortunately, this usually ends up increasing the cost of the original emergency. If you don’t have the cash to pay emergency expenses, they can rapidly pile up and accrue large amounts of interest.
How to avoid it: An emergency fund is the cornerstone of a solid financial plan and can help keep you out of debt by covering life’s unexpected but certain expenses. Start with a small cushion, such as one month’s worth of expenses, and try to build that to at least three to six months’ worth over time.
7. Balance Transfers Without a Payoff Plan
Zero-percent balance transfers can be a great way to buy some time to pay off your outstanding debt. But if you don’t have a plan to knock that debt down before the promotional period expires, things can get even worse. You’ll usually have to pay a fee of 3% to 5% to conduct the balance transfer in the first place, and your interest rate will usually pop back up to the mid-20% range as soon as the 0% transfer period ends.
How to avoid it: Before transferring a balance, calculate exactly how much you need to pay monthly to eliminate the debt before the promo expires — and stick to it.
8. Emotional or Stress Spending
It’s an unfortunate fact that some Americans turn to impulse shopping when under stress. The convenience of credit cards makes it far too easy to find an outlet for this emotional spending.
How to avoid it: Implement some guardrails to prevent emotional spending. Wait 24 hours before making discretionary purchases, and avoid online shopping altogether if possible. At the very least, do not save your credit card details on apps or shopping sites, as that extra step can prevent impulsive decisions.
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