Credit card debt can be a significant burden, with high-interest rates and minimum payments that can keep you in debt for years. In 2020, the United States Census Bureau reported that the average amount of credit card debt carried by an American individual exceeded $7,500. Due to varying unemployment rates and economic inflation, many people resort to using credit cards as a means of financing their daily lives.
Accumulating credit card debt can become the largest obstacle for those striving to increase their wealth. Carrying long-term and high amounts of credit card debt is among the worst things you can do for your personal financial health.
The Real Costs of Credit Card Debt
Interest Rates
In 2022, the average APR on a credit card was about 20%. If you have a complicated credit history, your interest rate could be even higher. As your credit card statement is legally required to inform you, the debt service costs always exceed the minimum payment. This cost will continue to grow, even if you never spend again.
Fees
Credit card companies also stack late fees, collection fees, annual fees, and other miscellaneous charges on top of interest. These fees then increase your total balance and are charged interest at the same rate.
Impact on Credit Score
Carrying a credit card balance from month to month can be detrimental to your credit score. Here’s how:
- Debt utilization ratio: This is the percentage of your available credit that you’re currently using. Say you have a credit limit of $5,000 and you carry a balance of $2,500. That means your debt utilization ratio is 50%. Anything higher than 7% can negatively impact your credit score.
- Debt-to-income ratio: When you carry credit card debt, it increases your debt-to-income ratio, which is the amount of debt you have compared to your income. This can make it harder for you to get approved for new credit or loans, as lenders may view you as a higher-risk borrower.
The Cycle
Accumulating credit card debt can quickly spiral into a vicious cycle. Balances add up to where you’re only able to afford minimum payments each month. This can increase your debt utilization ratio and cause your credit score to plummet. A poor credit score leads to higher interest rates and tougher lending terms, which can make it even more challenging to pay off your debt. This cycle of debt and bad credit can be challenging to break out of, but it’s essential to take steps to do so to avoid long-term financial difficulties.
802 Credit Union can help
Fortunately, 802 Credit Union is here to help you get out of the crushing cycle of revolving credit card debt. If you’re struggling with credit cards, a debt consolidation loan can be a helpful tool for paying it off. By securing a lower interest rate, fixed monthly payments, and a simplified payment schedule, you can pay off your debt faster and improve your finances.
Alternatively, we offer VISA credit cards with low interest rates and no balance transfer fees or annual fees.
It’s time to take control of your financial future. Stop by 802 Credit Union today to discuss a debt consolidation loan or apply for an unsecured loan online.
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