Since the pandemic began, more than 60 percent of Americans are living paycheck to paycheck. Even before the pandemic, though, that number was still above 50 percent.
At face value, credit cards — that shiny piece of plastic that represents potentially thousands of dollars in spending ability — may seem like a reasonable solution for those who are strapped for cash or who simply want to spend a little more money than they currently have on hand.
But in reality, credit cards are a recipe for disaster if you’re not in a position to pay for what you’re spending. And if you want a secure, prosperous financial future, you will want to stay away from unhealthy credit card spending — and get out from under credit card debt.
Let’s explore all you need to know about credit card debt — and how to get rid of it.
The average credit card balance for Americans is about $6,500. Because there is no collateral involved, credit card debt is considered to be higher risk for lenders. That means your credit score will take a hit if you are late with or miss payments — not to mention that you will likely face high interest rates and painful late fees. It doesn’t take much to spiral into a cycle of ever-deepening debt.
Why avoid credit card debt
Credit card spending might seem like a good temporary solution for someone who is struggling to pay bills. Using a credit card might feel like a way to enjoy something when you just don’t have the cash on hand. Don’t fall for it, though — there are SO many reasons to avoid credit card debt.
For one, studies show that you’ll always spend more with a credit card than you would if you were paying cash. And it makes sense: when you pay with cash or with a debit card, you immediately feel the discomfort and loss of the money you spend. But with a credit card, it’s easy to “spend now, think about paying it off later” because you aren’t feeling the after effects of actually parting with your money in the moment.
Lots of consumers use credit cards throughout the month, with good intentions of paying it off at the end of the month. But this is something to avoid for two reasons. First, this kind of spending likely means you don’t have a clear budget — at the very least, using a credit card for basic expenses may make it harder to stick to your budget. And second, even if you do plan to pay off your balance every month, life happens. If you forget, lose track, or begin to spend more, interest rates and late fees will result in paying much more than you would have if you had just used cash in the first place.
Many consumers use credit cards and pay them off each month in the name of “boosting their credit score.” Some of the best finance minds will remind you, however, that your credit score involves much more than credit card usage. And further, it is not absolutely necessary to have a credit score to buy a home. While credit cards may have some positive impact on your credit score, it’s not absolutely necessary — what’s more, just one missed or late payment can actually lower your credit score.
How to avoid credit card debt
The uncomfortable truth is that if you can’t afford to pay for something without using credit, you just can’t afford it. Emergencies happen though, and I certainly won’t tell you to not cover yourself and your family by having a credit card as a last resort. But it is important to carefully outline what an emergency is and what you are willing to reasonably use a credit card for.
For example, a vacation, a fun purchase, or essentials that should be included and covered by your monthly budget aren’t emergencies, and it’s wise to keep those expenditures off of credit cards. You’re only hurting your financial future by depending on credit instead of your budget in non-emergency situations.
The logical steps to avoid credit card debt, then, are ensuring that you spend less than you make; having a clear budget in place; and most importantly, have clear financial goals and a plan to reach them. For fun expenses that are outside your normal budget, a defined savings plan will help you avoid using credit cards so you can do things like go out to eat, go on vacations, and make a few fun purchases without regretting it when your credit card statement arrives.
How to get rid of credit card debt
The first and most important step to getting rid of credit card debt is knowing where you stand with your debt and forming a clear plan. Start by writing down all of your credit card balances, and commit to no longer using credit cards other than in case of serious (and I mean, very serious) emergency. Create a budget that will allow you to stop using credit cards for basic monthly expenses. This may require identifying where you can cut expenses or add income to put toward your debt.
When it comes to actually paying off your debt, there are a number of approaches, but the “debt snowball method” is one of the most popular. Write out your credit card balances from smallest to largest, and then work to pay off the smallest balance first while paying minimums on the other cards if you have multiple credit card debts. Once you’ve cleared the smallest debt, take what you were using to pay off that first balance and pay off the second, and then move to the larger ones. Seeing this progress will give you the motivation and drive to dig deeper and sacrifice more to get out from under credit card debt.
Credit cards may sound enticing at first, but it’s important to recognize the drawbacks and potential dangers of using unsecured, revolving debt regularly. Paying off credit card debt, while difficult, can be the start of a completely new financial future for yourself and your family.