Credit card interest rates have been climbing steadily over the last decade. During that 10-year stretch, the average credit card interest rate nearly doubled, climbing from about 12.9% in 2023 to nearly 24% today. And between the Feds rate hikes and pauses, card rates have compounded significantly over the last two years in particular.
The impact of the uptick in card rates has been profound for many cardholders. The total amount of outstanding credit card debt in the United States is currently $1.12 trillion, with millions of households struggling to make even minimum payments — as evidenced by the recent uptick in delinquent credit card accounts. And as the cost of carrying a balance has increased, more Americans are finding themselves trapped in a cycle of debt.
If you find yourself in a similar situation, these credit card debt issues can have a big impact on your financial stability, especially in todays high-rate environment. Below, well detail why.
Credit cards can seem like an easy way to buy now and pay later. However carrying long-term credit card debt can lead to financial disaster. Here are 10 compelling reasons why you should avoid credit card debt.
High Interest Rates Lead To Balances Snowballing
The average credit card interest rate is over 20% This means if you carry a balance, the amount you owe grows rapidly as interest is added each month For example, if you owe $1,000 at 20% interest and only make minimum payments, it will take over 3 years to pay off and you’ll end up paying nearly $400 in interest charges.
Penalties And Fees Make Debt More Expensive
In addition to high ongoing interest rates, credit cards often charge fees and penalties that add to your costs You may face late fees if you miss payments, over limit fees if you exceed your credit limit, balance transfer fees, and foreign transaction fees These can quickly add up and make your debt even more expensive.
Credit Utilization Hurts Your Credit Score
Maxing out your credit cards or carrying high balances hurts your credit score. Lenders like to see you using less than 30% of your available credit. High utilization makes you look risky and will cause your score to drop. A lower credit score means higher interest rates on future loans and credit cards.
It Enables Overspending Without Limits
Unlike cash, credit cards allow you to overspend without immediate consequences. It’s easy to swipe now and worry about paying later. But this can lead to impulse purchases and buying things you can’t actually afford. Before you know it, your balances have crept up past what you can reasonably pay off.
Minimum Payments Are A Trap
Credit card companies only require you to pay a small percentage of your balance each month. While this seems manageable, it means debt takes much longer to pay off as interest builds up. Minimum payments on high-interest debt can take decades to eliminate balances.
Debt Snowballs Are Hard To Stop
Once you begin accumulating credit card debt, it can quickly spiral out of control. As balances rise, interest charges take up more of your minimum payments. Soon you are struggling to even keep up with interest, let alone paying down principal. This debt snowball effect makes credit card debt extremely difficult to get out from under.
Credit Card Debt Can Lead To Bankruptcy
If credit card debt becomes completely unmanageable, bankruptcy may feel like the only option. While bankruptcy provides relief, it also wrecks your credit for 7-10 years. Bankruptcy should only be considered as an absolute last resort if you have no other options.
It Causes Stress, Anxiety And Depression
Research shows that being in debt, especially high levels of credit card debt, can negatively impact both physical and mental health. The stress of owing money and trying to keep up with payments can cause anxiety, insomnia, and depression.
Relationships Suffer From Money Issues
Money is frequently cited as a top cause of relationship problems and divorce. Credit card debt can strain marriages and partnerships because it’s difficult to talk about and causes financial stress. Avoiding credit card debt lessens potential money issues.
You Gain Nothing By Paying Interest
With savings accounts and investments, your money grows over time. But with credit card debt, you gain nothing from all the interest you pay. That money does not benefit you in any way. Avoiding credit card debt means keeping that money in your own pocket.
5 dangers of carrying credit card debt in today’s high-rate environment
There are multiple dangers to carrying credit card debt right now, including:
Carrying a balance on a credit card can lead to exponential debt growth. For example, if youre paying just the minimum (interest plus 1% of your balance) on a $5,000 balance at 24% APR, the interest would accrue to about $1,200 in just one year. As that balance compounds, it can be increasingly difficult to pay down the principal. You may find yourself owing multiples of your original balance within a few years, for example, which can lead to a situation where even basic necessities purchased on credit become unaffordable luxuries in the long run.
As balances grow, so do the minimum payments owed on the account. However, these payments are often structured to cover little more than accrued interest. In turn, if you only make minimum payments, you may find yourself barely making a dent in your principal balance, potentially taking decades to pay off relatively small initial purchases.
This trap can have far-reaching consequences. It can drain resources that could otherwise be used for your savings, investments or important life milestones. And the extended repayment period exposes you to a greater risk of financial setbacks that could derail your debt repayment plans entirely.
High credit card balances relative to credit limits can significantly damage your credit score. This not only makes it harder to qualify for new credit but can also lead to higher interest rates on other forms of borrowing, such as mortgages or auto loans.
And the ripple effect can be profound. It might result in you being denied rental applications, facing higher insurance premiums or even losing out on job opportunities. Ultimately, the long-term cost of a lowered credit score can amount to tens or even hundreds of thousands of dollars over a lifetime.
As your card debt becomes unmanageable, the risk of defaulting increases. This can lead to collections actions, lawsuits and long-lasting damage. For example, if youre sued and lose in court, your creditors may pursue wage garnishment or asset seizure, further destabilizing your financial situation. The legal fees associated with defending against these types of actions can add significantly to the overall debt burden, too.
The money spent on interest payments represents lost opportunities for wealth building. Funds that could be invested in retirement accounts, used for education or put toward homeownership are instead funneled to credit card companies. For example, $10,000 spent on credit card interest over a decade could have grown to over $20,000 if invested in a diversified stock market fund, assuming average market returns.
Credit card debt relief solutions to consider
If youre struggling under the weight of your credit card debt, there are debt relief solutions that could help, including:
- Debt consolidation loans or programs: When you consolidate your card debt, you roll multiple card balances into a single, fixed-rate loan, which can simplify repayment and potentially save thousands of dollars in interest.
- Credit card debt forgiveness: Some credit card companies may be willing to negotiate and accept a lump-sum payment thats lower than your current balance if youre at risk of fully defaulting on what you owe, essentially forgiving a portion of your balance.
- Debt management: With a debt management plan, experts try to negotiate with creditors to lower your interest rates or waive certain types of fees, making it more affordable to pay off what you owe.
- Hardship programs: Many card issuers offer temporary hardship programs that provide reduced interest rates or payment deferrals for those facing short-term financial difficulties.
- Bankruptcy: While a last resort, bankruptcy can provide a fresh start for those overwhelmed by unsecured debt, but the long-term consequences should be carefully considered.
As credit card interest rates remain at high levels, its important to try to manage and reduce your credit card debt. By taking proactive steps, you can protect yourself from the compounding dangers of high-interest credit card balances. And if youre already struggling with credit card debt, its crucial to remember that help is available. The key is to act decisively to avoid your debt from becoming an insurmountable financial burden.
Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
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FAQ
Why is it bad to have credit card debt?
… card debt is considered “bad” debt because of its high interest rates and low minimum payments, and the fact that it isn’t used to buy appreciating assetsJul 21, 2023
Is it good to have no credit card debt?
Having no credit card debt isn’t bad for your credit scores, but you do need to maintain open and active credit accounts to have the best scores.Aug 25, 2022
Why is it bad to not have a credit card?
For a person who lives paycheck to paycheck, not having a credit card can mean absolute disaster if they have an emergency that they cannot afford to handle, such as a car breaking down. It can easily result in someone losing their job, not being able to pay rent, losing their apartment, and ending up on the street.
Why should people avoid credit cards?
Credit cards make it easy to buy things you may not be able to afford. Because you’re not paying for purchases upfront, it can feel like you’re spending “free money,” which can lead to overspending. This can result in carrying a balance that you’ll have trouble paying off.