A recent study found that more than half of Americans who picked up a new pastime during the pandemic ended up accruing more credit card debt. For some, this is not an issue. People were compelled to stay at home, and for those who were fortunate enough to maintain their employment and enterprises, the extra time they suddenly had gave them the opportunity to begin doing things they had not been able to do before.
However, some people might be worried about the amount of debt they are accumulating and that it will eventually become unmanageable. Therefore, how can you tell if your credit card usage is out of control? The ten indicators listed below will help you make that determination.
Credit cards, while convenient, can be a double-edged sword. While they offer a way to build credit and earn rewards, they can also lead to a dangerous debt trap if not managed responsibly. Here are four behaviors that can land you in a credit card debt trap:
1 Failure to Control Your Expenses:
This is the most fundamental pitfall. Spending beyond your means and exceeding your repayment capacity is a surefire recipe for debt accumulation. It’s crucial to create a realistic budget track your expenses, and differentiate between needs and wants.
2 Minimum Payment Trap:
Even though paying the minimum amount due each month could seem doable, it’s a costly and time-consuming method of clearing your debt. The interest on the outstanding amount can accumulate rapidly, making it challenging to ever be debt-free.
3. Ignoring Payment Terms:
Many credit cards offer enticing perks and discounts, but often at the cost of high-interest rates. Always read the fine print and compare different cards to find one that aligns with your spending habits and offers favorable terms.
4. Using Credit Cards as Cash Advance Machines:
It may be alluring to write checks against your credit limit or withdraw cash from ATMs, but doing so carries significant cash advance fees. Avoid using your credit card for these purposes unless absolutely necessary.
Three Options for Dealing with Unmanageable Credit Card Debt
If you find yourself drowning in credit card debt, don’t despair. There are options available to help you regain control and get back on track. Here are three potential solutions:
1. Negotiate with Your Creditor:
Reach out to your credit card company and explain your situation. They may be willing to work with you by lowering your interest rate or creating a more manageable payment plan.
2. Seek Credit Counseling:
Credit counseling organizations offer valuable guidance and support to individuals struggling with debt. They can help you develop a budget, negotiate with creditors, and explore debt management options.
3. Consider Bankruptcy:
In extreme cases where debt becomes unmanageable, bankruptcy may be a viable option. Chapter 7 bankruptcy allows for the discharge of certain debts, while Chapter 13 involves a court-approved repayment plan. However, bankruptcy should be considered a last resort due to its long-term impact on your credit score.
Avoiding the Credit Card Debt Trap
Being proactive and frugal with your expenditures is the best strategy to escape the credit card debt trap. Here are some tips:
- Create a Budget and Track Your Expenses: Knowing where your money goes is essential for managing your finances effectively.
- Use Credit Cards for Essentials Only: Avoid impulsive purchases and stick to using your credit card for necessary expenses.
- Pay Your Balance in Full Each Month: This is the best way to avoid interest charges and stay debt-free.
- Choose a Card with Low Interest Rates and Favorable Terms: Compare different cards and choose one that aligns with your spending habits.
- Seek Help if Needed: Don’t hesitate to reach out to a credit counselor or financial advisor if you need assistance managing your debt.
Through adherence to these guidelines and circumvention of the previously mentioned obstacles, you can leverage the potential of credit cards while evading the debt trap. Recall that using credit cards sensibly can help you establish credit, accrue rewards, and reach your financial objectives.
You Use Credit Cards for Everyday Purchases
Using your credit cards for everyday purchases is not necessarily a bad thing. For instance, every time you use your credit card to make a purchase, you might be able to earn cash back or rewards. It might not be a red flag if you are only using your credit card for regular purchases to accrue these rewards. But if you are forced to use your credit card for regular expenses and necessities, it might indicate that your debt is out of control.
You Are Denied for New Credit
Sometimes credit card companies are able to tell that your debt is too high for you to handle before you do. The business you are applying with will review your credit report following your application for a new credit card. They will refuse you new credit if they notice that you already have large credit card balances because they will interpret it as an indication that you are unable to pay your existing debt.
Should I Try Settling My Credit Card Debt?
FAQ
What could lead you to unmanageable credit card debt?
What is the main cause of serious credit card debt?
How do people get into so much credit card debt?
What is unmanageable debt?
Why is it important to avoid credit card debt?
It’s important to avoid credit card debt for one big reason: Carrying a balance can be costly; credit cards are one of the most expensive forms of credit, with higher interest rates than car loans or personal loans. According to the Federal Reserve, the average annual percentage rate ( APR) for cards that assessed interest was 22.16%.
What happens if you miss a credit card payment?
And if you accumulate too much debt and miss a payment, your credit card issuer can penalize you with a higher penalty APR (some companies charge rates as high as 29.99%) and late payment fees. If you pay off your credit card’s statement balance in full every month by the payment due date, the card issuer doesn’t charge you any interest.
Why do people get into credit card debt?
Here are some of the most common reasons why people end up with credit card debt. 1. Credit cards let you spend more than you make The most obvious reason why people get into debt is also the simplest: Credit cards make it possible for people to outspend their earnings.
Is credit card debt a problem?
Credit card debt is a common problem, especially with rising prices for food, housing, and other essentials. In fact, Experian reported that the average credit card balance was $6,365 as of the end of June 2023, an increase of nearly 12% from June 2022.