It’s estimated that around 60 million American households regularly carry outstanding credit card balances. According to a WalletHub study, the average household’s credit card balance stands at $8,425. This situation highlights a crucial point: carrying a balance—meaning you don’t pay off your total amount due each month—incurs interest, leading to you paying more than you owe on your card.
But why are so many of us falling into this debt trap? By examining five common reasons for accumulating high card balances, we can help you avoid this financial pitfall.
Reason #1. Cardholders Just Pay the Minimum Payment Amount.
Credit card statements typically display several types of “amounts due.” When making a payment, you can choose from:
- Minimum amount due: The least you can pay by your due date to avoid a missed payment fee.
- Statement balance: The actual amount due by your due date, including all transactions posted during the current billing cycle, to avoid interest.
- Current balance: Your total account balance, reflecting your current amount due plus all new transactions since your last statement.
Many cardholders misunderstand these terms. They often believe that making the minimum payment is sufficient. However, while this prevents late fees, it does not effectively reduce your actual balance. In fact, minimum payments typically cover only the interest charges and a minuscule portion of the debt!
What You Should Do Instead: Pay your statement balance every time! Even if you can’t afford to pay the balance in full each month, aim to do so as soon as possible. Submit as much as you can afford to expedite your journey out of debt and avoid accumulating interest.
Reason #2. Cardholders Can Spend More Than They Make.
Using credit means borrowing money to make purchases. This can lead to overspending, as cardholders are not limited to the cash in their wallets or the size of their paychecks. It’s all too easy to outspend your earnings.
What You Should Do Instead: Know your monthly earnings and refrain from charging more than that amount. It may require significant willpower, but postpone major purchases that could push you over your budget.
Reason #3. Cardholders Use Credit to Cover Financial Emergencies.
Unexpected expenses, such as a flooded basement or a medical emergency, can wreak havoc on your finances. Many cardholders resort to charging these costs when they lack alternatives, making it nearly impossible to pay off the balance at the end of the month.
What You Should Do Instead: Establish an emergency fund… NOW! Aim to set aside at least 3-6 months’ worth of living expenses to cover costs in case of job loss or major medical events. Only tap into this fund for true emergencies.
Reason #4. Cardholders Can Open Too Many Accounts.
Credit card companies make it incredibly easy to apply for and get approved for accounts. You’ve likely been asked at checkout whether you want to open a card to save on your purchase. However, having too many accounts can lead to overspending and missed payments, resulting in late fees and increased interest.
What You Should Do Instead: While you don’t need to limit yourself to just one credit card, only open as many as you can manage effectively. Resist the temptation to open new accounts for appealing perks, as they won’t help if you’re drowning in debt.
Reason #5. Cardholders Are Lured in by Rewards.
Cash back and other credit card perks are enticing, but many cardholders fail to realize that the value of these rewards is often less than the interest and finance charges that accrue if they can’t pay their balance in full each month. Credit card companies are in business to make money, after all.
These rewards often come with “welcome bonuses” that encourage cardholders to spend beyond their means, making it difficult to pay off balances monthly.
What You Should Do Instead: Use your rewards card only for purchases you would make anyway. If you’re genuinely in the market for a high-ticket item, using a rewards card might earn you valuable points. However, avoid the rewards trap if it leads to impulse buying.
Managing your finances well is the best way to avoid the financial traps that many credit card users fall into. While advice like “Don’t go into debt in the first place!” may seem unhelpful if you’re already in debt, the friendly financial counselors at DebtGuru.com are ready to assist you in finding effective debt management solutions.
