Credit cards can be great tools. They offer the chance for you to earn rewards, including merchandise, free travel, and cash back — as well as the ability to easily break up large purchases.
But at some point, many of us end up with credit card debt — according to the Federal Reserve, Americans have more than $1 trillion in credit card debt. We carry balances, an unexpected emergency expense requires immediate attention, or some other issue arises. It’s common to feel overwhelmed.
But is credit card debt bad? Let’s take a look.
Is credit card debt bad?
Let’s be honest: Credit card debt isn’t the worst type of debt out there. While credit card interest rates can be higher than 20% — which isn’t great — it’s also possible to find introductory 0% APR deals on purchases and balance transfers. Plus, you might be able to get a rate under 15% if you have good credit.
Compare credit cards with payday loans, which typically feature APRs of about 400% but can sometimes be higher than 600%, depending on state law. If the choice in an emergency is between using a payday loan and putting it on a credit card, the card is often the better choice.
When you compare credit cards with personal loans, however, personal loans may come out on top. APRs on unsecured personal loans could be less than 10% for those with good credit, potentially making them a better choice for qualified borrowers.
6 ways credit card debt doesn’t serve you
Even though credit card debt isn’t the worst kind of consumer debt, it’s probably not helping you either. Here are some of the ways credit card debt might be dragging you down.
1. It’s expensive
While not the most costly form of debt, the reality is that credit card debt is plenty expensive. In fact, most credit card interest charges are compounded daily, so interest is added to your balance every day.
Consider a credit card with a 17.99% APR and a $6,000 balance. At the end of the day, you’ll be charged 0.0493% in daily interest, or $2.95. That $2.95 is added to your balance, so it becomes $6,002.95.
But let’s say you spend another $100 on your card the following day. Now your balance is $6,102.95, and that’s the number you’ll be charged interest on, bringing your new daily interest charge to $3.01.
You can see how things can really add up over the course of the year if you keep using your card and don’t pay it down. If you pay $3 a day in interest, you’d pay $1,095 in a year — just as the fee for borrowing money.
2. Making the minimum payments can keep you in debt longer
It’s often harder to keep track of revolving credit, since your interest charges and balance can change every month. The affordable minimum payments and the ability to keep charging more money as you free up space can keep you in debt much, much longer — costing you even more.
“Once you get into the minimum payment cycle, it’s very hard to get out,” says Julia Kramer, a Certified Financial Behavioral Specialist and founder of Iaso Consulting. “The charges just keep accumulating, and the outstanding balance grows.”
Using a credit card calculator, it’s possible to calculate what you’d pay in interest on a $6,000 credit card balance with a 3% minimum payment and a 17.99% APR. If you didn’t charge anything else and only paid the minimum, it would take nearly 15 years and cost you more than $5,000 in interest to pay off.
3. It can hurt your credit score
“Many consumers understand that credit card debt can negatively impact their credit score,” says Dan Wilke, founder of credit education website Credit Liftoff. “It’s important to understand exactly how this happens.”
Wilke points out that, in general, the closer you are to maxing out your credit cards, the bigger the negative impact on your score. The amount of available credit you use is known as your credit utilization, and it accounts for 30% of your FICO credit score. The higher your credit utilization, the lower your credit score.
Additionally, if you have enough credit card debt that it becomes unmanageable and you start missing payments, your score will be affected to an even greater degree. Payment history accounts for about 35% of your FICO score and is the most important factor, says Wilke.
And if your credit card debt is dragging down your score, other financial services — such as an auto loan or mortgage — can be more expensive. According to Wilke, depending on state laws, poor credit can even add to the cost of items like your insurance premiums, telecommunications service, and security deposits for housing.
4. It eats into any credit card rewards you’re earning
You might be enjoying credit card rewards, but what happens if you’re paying such high interest? Your rewards suddenly become much less valuable.
Let’s say you sign up for the Chase Freedom Unlimited, one of the best cashback credit cards out there. With the card, you can earn 3% cash back on up to $20,000 in purchases in your first year of card membership and 1.5% cash back after that. Plus, you get a 0% APR on purchases and balance transfers for 15 months.
But if you carry a balance after that time, you could pay up to 25.99% APR, depending on your credit score. That more than wipes out any value from the cash back.
Whether you’re getting cash back or airline miles, the effect can be the same. You might be able to use points to get a $500 airline ticket for free, but if you spent more than $1,000 in interest for the year, you’ve actually come out behind.
5. It can hold you back from other goals
When so much of your income is going toward keeping up with minimum payments, it’s hard to reach other goals, points out Kramer.
“The longer you wait to start saving for your future retirement, the less likely you are to reach your goals, due to the nature of compound interest,” she says.
On top of that, being stuck with credit obligations can keep you from being able to take advantage of educational, business, and travel opportunities you might be interested in.
6. It can lead to stress and other issues
Finally, credit card debt isn’t just about the financial impact. Kramer says the stress of credit card debt can lead to increased depression and anxiety — and the physical health issues that accompany them. Plus, when you’re stressed about debt, it can put strain on your relationships with loved ones.
What to do if you have credit card debt
When you’re in debt, take a step back and consider your options. Making a debt repayment plan can help you move forward and figure out how to pay off debt faster. Sit down and figure out how much you can put toward debt reduction each month, and then tackle your debts one at a time.
You can also take the following steps to help you stay on track and even speed up the process.
Stop adding to what you owe
Your first step is to stop adding to the debt you already owe.
“Don’t make any charges to your card beyond what you are able to pay in a month,” says Wilke. “Then you can put extra funds toward reducing your debt.”
If you can’t seem to get a handle on your credit card spending, suggests Kramer, take your card out of your wallet to reduce the temptation to use it. You can freeze it in a block of ice or bury it in your yard to make it much harder to use, giving you time to think about whether you should be using it at all.
Get a lower interest rate and consolidate
Reducing your interest rate so more of your payment goes toward reducing your principal is a good next step.
“See if you can transfer your debt to a 0% APR card,” says Wilke. “Many cards offer a 0% APR for balance transfers, and it can help you make a huge dent in your debt and reduce what you pay in interest.”
It’s also possible to use a debt consolidation loan to get all your debts in one place. Depending on your credit, you might get a lower interest rate and save money on interest if you refinance credit card debt. Plus, with all your payments under one roof, you’re more likely to avoid mix-ups and stay on top of your debt.
Let yourself have some fun
To be successful, Kramer points out, you need to make sure you allow yourself some degree of fun. After all, if you feel like you’re not going anywhere, it can be difficult to stick with your plan.
“Treat yourself to every victory,” says Kramer. “And visualize what you want to do once you get out of debt.”
She also recommends looking for ways to engage your mind and body, such as taking a community yoga class, attending a lecture series at the library, or volunteering with a local organization so you don’t get bored and lonely — and start spending to fill the void.
Understand the underlying cause of your credit card spending and debt, and recognize how credit card debt is negatively impacting your life. This can provide you with the motivation you need to start changing your habits and pay down your debt.
“Self-knowledge and self-compassion are the key components to healthier financial behaviors,” says Kramer. “Understanding your money history and your money beliefs is the first step.”