Borrowing

Make this credit card mistake and ‘you could be in debt for a really long time,’ says expert

"Making only the minimum payment should be a last resort, as you'll find yourself accruing costly interest."

Share
Twenty/20

Americans have an average credit card balance of $5,525, credit bureau Experian's latest findings show. If you only paid the minimum amount due each month, it could be well into the 2030s by the time you'd be able to pay that off, cautions CreditCards.com analyst Ted Rossman.

Paying only the minimum on what you owe is a common mistake, but it can have serious repercussions, Rossman says, given that the national average credit card interest rate is 16.16%. "Even $5,525 could be crippling [and] you could be in debt for a really long time," he adds. By his calculations, you'd be making payments for "16 years and owe more than $6,000 in interest."

While many Americans are getting their finances back on track after the pandemic, some still have work to do. Based on data from the financial resource website Inside 1031, which polled 1,000 U.S. adults with at least one credit card, 55% of consumers carry a monthly balance. Of those, 46% owe over $5,000, 26% owe more than $15,000, and 18% are at least $20,000 in the red.  

Credit card debt can add up fast

Credit card debt can snowball for those who can't afford, or choose not, to pay their full balance on time. Interest rates are "much higher than we see on most other forms of debt, [such as] mortgages, car loans, and student loans," says Rossman, meaning the "debt takes a big bite out of your budget."

Plus, the Covid crisis locked in debt for many respondents. People were forced to turn to credit to pay crucial expenses: Since March 2020, 44% of Americans said they increased their card balances, and roughly 49% say they depend on credit to cover their necessities.

In the Inside1031 poll, Gen Xers were the most likely generation to owe more than $15,000. About one-third, 32%, did, versus 17% of Gen Zers, 25% of millennials, and 16% of baby boomers.

Steps to take to pay down your credit card balance

As the holiday season come near and shoppers add more to their balances, "you need a serious plan" to pay down any debt you have, Rossman says. Taking some basic steps with your budget may help.

Almost half (49%) of the Inside 1031 poll-takers who have avoided credit card debt said they limit their spending to what they can afford to pay off in full. Over a third each said they cut back on discretionary spending (36%) or reduced their credit card spending by using other forms of payment (36%).

"Look at where you can cut back," says Colleen McCreary, chief people officer and financial advocate at Credit Karma. "If you are deciding whether you should pay off your monthly credit card bill or pay for any 'nice-to-haves,' the credit card bill wins. Making only the minimum payment should be a last resort, as you'll find yourself accruing costly interest."

Talk to your credit card issuer if you need more help, she advises. You could ask your lender to switch you to a lower interest rate. In a 2018 CreditCards.com survey, 70% of people who tried asking for a better rate got one. Some issuers also let you set up a payment plan or offer temporary forbearance for financial hardship.

VIDEO5:1905:19
How people with 10+ credit cards make it work

Video by Mariam Abdallah

"Don't let a due date for a bill come and go entirely unpaid — use your resources to avoid racking up interest and lowering your credit score," McCreary says.

Another strategy is to use a balance transfer card, which allows you to transfer debt from a high-interest card to another card with no interest from anywhere between a year to 20 months. Note, though, "that these tend to charge upfront transfer fees of 3% to 5%," says Rossman. "It could be well worth it, but make sure that you're making real progress, not just moving debt around."

Try "nonprofit credit counseling agencies like Money Management International and GreenPath [that] can help you with advice, consolidate your monthly payments, and negotiate lower interest rates on your behalf," Rossman says.

VIDEO2:5002:50
How to improve your credit score in 4 steps

Video by Stephen Parkhurst

Americans are making strides toward better credit. FICO scores jumped in 2020, hitting a record average 710. Total credit card balances fell 15% from the fourth quarter of 2019 to the second quarter of 2021, according to the New York Federal Reserve, and most people think they can zero out their balance in two years.

The main point is to eliminate your credit card debt ASAP, "and give some thought to what got you into debt in the first place," Rossman says. "Debt payoff isn't easy, but it can be done."

More from Grow: