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Using a credit card for everyday purchases and bills can be incredibly convenient, and that’s especially true when you compare it to using a debit card. Your credit card won’t make you subtract each transaction from a check register to balance your account, and you don’t have to worry about spending more than you have in the bank, either.
Your credit limit will dictate how much you can spend instead and, as long as you pay your credit card statement balance in full each month, you can use your card without accruing interest. Many credit cards also offer lucrative rewards for spending and other perks, which can make the process even more rewarding over time.
But, what happens when you don’t pay your credit card statement balance in full each month? Even people who only carry a balance every once in a while might be surprised to find out how much credit card debt can cost them.
Paying off $5,000 in unexpected bills
Racking up credit card debt can be almost too easy sometimes, and that’s especially true when you wind up with unexpected expenses or bills to pay off. Unfortunately, today’s sky high credit card interest rates make carrying debt especially punishing. A new CardRatings.com study found that the current average credit card interest rate is 25.03% (as of 2/22/24), and that’s just the average.
How much will this kind of rate cost you? Imagine your car breaks down at the same time you need new tires, and the repair shop estimates your total costs to get back on the road will be around $5,000. You decide to pay your repair bill with plastic since you’re short on cash, and since you get the opportunity to earn 2% cash back on your purchase with your rewards credit card ($100 in cash back rewards).
If your credit card charged the average interest rate of 25.03% and you were only able to pay $250 per month toward your debt, it would take you 27 months to pay off the balance.
Obviously, the pain gets even worse if you were only able to pay $150 per month toward this debt, which is around what the minimum payment would be. In that case, you would have to make payments for 58 months to pay off that debt.
Dealing with $20,000 in credit card debt
While paying off $5,000 in surprise bills can wreak havoc on your finances, there are situations where people have considerably more debt than that — and for a longer timeline. It’s not unheard of for families to have $20,000, $30,000 or $40,000 in credit card debt or more that has accumulated over many years.
Imagine someone has $20,000 in credit card debt at the average interest rate and they want to pay it off in two years (24 months). It would take an estimated average monthly payment of $1,043 to meet this goal. Left unpaid, this balance would accrue approximately $416 each month in interest charges.
➤ SEE MORE:How to avoid credit card interest and fees
If they could only pay the minimum payment, or around $450 per month, on the other hand, they would be paying off this debt over 127 months!
Also remember that these totals and timelines only apply if someone stops using credit cards for new purchases. If they kept on using cards for new spending and continued making minimum payments, this person may never, ever get out of debt.
Your best bet? Avoid credit card debt when you can
According to data from Experian, the average American with credit card debt carried $6,501 in balances in 2023. Meanwhile, the average person from Generation Z carried $3,262 in debt; millennials had $6,521 in balances; Generation X had $9,123 in credit card debt; and baby boomers had $6,642 in credit card debt.
This means consumers from all generations are paying more than they have to for everything they buy with a credit card. This can be avoided or minimized with the following steps:
- Consolidate debt with balance transfer credit cards. If you currently have credit card debt on a card with a high APR, consider consolidating that debt with a card that offers 0% APR on balance transfers for a limited time. You’ll likely have to pay a balance transfer fee for the privilege of debt consolidation, but you may be able to skip interest payments for up to 21 months.
- Lean on 0% APR credit cards for new purchases. When planning a large purchase (e.g. new furniture or appliances), sign up for a credit card that offers zero interest for a limited time first. This could help you pay down your new balance interest-free for well over a year or longer, and you could even earn rewards on the purchase.
- Snowball your way out of debt. If you currently have credit card debt and other outstanding bills, consider using the debt snowball method to dig your way out. This debt repayment method has you pay the minimum payment on all your bills expected for the smallest balance, at which you’ll throw as much as you can at each month until it’s gone. As you pay off the smallest balances you owe one by one, you’ll ‘snowball’ the amounts you were paying into the next smallest debt.
- Use credit cards with a monthly budget or spending plan. If you’re actively using credit cards and trying to avoid debt, it can help to use your credit card only for planned purchases you know you need to make. Using a credit card with a monthly budget typically means only charging purchases or bills you can quickly cover with cash in the bank.
➤ SEE MORE:Adopt these credit card habits to help improve your finances
The bottom line
Credit card interest rates are exorbitant right now, so you should strive to avoid carrying a balance on your credit card unless you absolutely have to. Even then, there are numerous credit cards that offer 0% APR on purchases, balance transfers or both. These cards don’t provide you with a permanent solution to crazy-high interest rates, but they can buy you some time.
You can also focus on avoiding credit card debt altogether with the goal of earning rewards and enjoying your card’s perks instead. This strategy works best when you use a credit card for purchases you have the cash to pay for and nothing else.
