Understanding The Credit Card Trap
Did you know the average American household carries $6,358 in credit card debt?
If that isn’t alarming, consider this: A debt of $5,000 with an average interest rate of 24.99% where only the monthly minimum payment is made can accumulate $4,823 in interest over five years. It means you’ll pay nearly double the amount you spent!
Let’s take a look at credit card usage to learn how to stay in the clear.
The minimum payment mindset
Here’s how most people get trapped in credit card debt: You use your card for a purchase you can’t afford or want to defer payment, and then you make only the minimum payment that month. Soon, you are in the habit of using your card to purchase things beyond your budget. Since you’re making only the minimum monthly payment, it won’t seem to matter much if your credit card balance gets a bit larger.
When you’re trapped in this mindset, your balance barely budges. A minimum monthly payment on a $5,000 debt generally amounts to $150. But, only $47.30 of that goes toward the principal of your debt. The rest goes toward interest.
Credit scores and prolonged debt
Typically, the more of your available credit you’re using, the lower your score will be. If you’ve fallen into the minimum payment trap, there’s a good chance you’re using most of your available credit and hurting your score.
Another important part of your credit score is the trajectory of your debt. If you’re barely making progress on your balance, you won’t score high here, either.
A low credit score can make you ineligible for a mortgage, auto loan or employment opportunity. At best, it will result in higher rate if approved, which means paying more in interest.
Should I throw out my credit cards?
Keep some accounts open and active to maintain a healthy credit score; however, use your cards responsibly.
First, be careful to avoid the minimum payment trap. Live within your means and stay clear of mounting credit card debt. Before using your card, ask yourself if it’s worth paying double its price in interest and possibly harming your financial health.
Second, if you’re carrying a large credit card balance, work on paying more than the minimum due.
Third, use your credit cards for non-discretionary payments. This way, you’ll be keeping your accounts active without running the risk of overspending. Remember to pay your bill on time to avoid interest.
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