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Around 41% of Americans carry a balance on their credit cards, with the nation as a whole carrying a total of $887 billion of credit card debt in 2022, according to Lending Tree. That’s an awful lot of money to owe, and an awful lot of interest being raked in by credit card companies.
Even high-income earners can easily get into debt that they can’t pay off, especially if they start juggling multiple credit cards. Here are just some of the reasons you need to prioritize paying down credit card debt.
Credit Card Debt Is Probably the Most Expensive Debt You Have
With the exception of a few unethical and potentially illegal lenders, also known as loan sharks, credit card companies tend to charge significantly higher interest rates than other lenders. It’s not unusual to be dealing with an Annual Percentage Rate of 20% or more on credit card debt whereas the average interest on a 30-year fixed mortgage is 6.67%, and on an auto loan (for a new car), about 3.86%.
Credit cards, along with store cards, have one of the highest interest rates around, and that’s before you pay any annual fees just for the privilege of owning the card, or late fees on any payments you might miss. If you run up debt on credit cards and find yourself in the position of only being able to make minimum payments, you could end up paying two or even three times more than you originally put on the card.
Paying Down Credit Card Debt Can Make Your Credit Score Go Up
Part of how your credit score is calculated includes looking at your credit utilization rate. This is basically the amount of credit you’re using in relation to the amount you have access to, so if there’s $3,000 of credit available on a card, but you have an outstanding balance on that card of $1,500, your credit utilization rate is 50%.
Pay it down to $900, however, and you hit a credit utilization rate of 30%, which is what Experian recommends we should keep our rate under to try and keep our credit score healthy. Whereas some of the things that affect your credit score are difficult to change overnight, the credit utilization rate on your cards is one that can be changed pretty quickly if you’re able to make a few short-term sacrifices and pay off extra chunks of the outstanding balance.
A Credit Card Without a Rolling Balance Can Actually Be Profitable
As we’ve already touched on, credit cards are an expensive form of debt, so it seems unlikely that anyone (other than the credit card companies) could profit from a credit card. It is possible, however, if you use your card right, and that includes never carrying a rolling balance from one month to another.
Once you eliminate that balance, you can still use your card, and pay it off each month, without paying a single cent in interest. Choose the right card, and you may be able to earn loyalty points, cashback, or other perks each time you use it.
This strategy is only for the disciplined. You’ll need to use your card just enough to reap the rewards, without ever charging so much that you can’t afford to pay it off by the day your payment is due. If you can do that consistently, however, you’ll never pay interest. You’ll simply rake in the rewards offered by your card company.
If you’re putting together a plan to pay off debt right now, it’s almost certainly a good idea to start with credit card debt. If you really feel out of your depth, you might want to talk to a credit counselor first.
About the Author
I’m a freelance writer specializing in online business, personal finance, travel and lifestyle. I also work as a content creator for hire, helping brands and businesses tell their stories, grow their audiences, and reach their ideal customers. I’ve lived, worked and studied in six countries, across three continents. Stop by my blog TheSavvySolopreneur.net to learn how to run your own (very) small business on your own terms. You can also connect with me at my website KarenBanes.com or follow me on Medium.com.