Why You Should Care About Your Credit Card Debt

By: Latoya Irby

Credit Card Debt is a National Problem

You are not alone in dealing with credit card debt. With total revolving debt exceeding one trillion dollars according to the Federal Reserve, credit card debt is an issue affecting millions of Americans.

Why Credit Card Debt is a Personal Financial Problem

It’s good that credit card debt levels have decreased – the average credit utilization is currently 25%, the lowest level in a decade, according to Experian – but consumers still have a long way to go. Even if you can keep up with your credit card payments, credit card debt can affect your life in ways you may not realize or notice.

Credit Card Debt is Costly

Carrying a credit card balance means you have to pay interest every month until the debt is repaid. The higher the interest rates and the longer it takes to pay off the balance, the more you’ll pay in interest.

For example, if you have a balance of $5,221 at the average annual interest rate of a current credit card, which is 21.96%, it will take more than 16 years to pay it off, during which time you will pay a total of $13,238.18 to the credit card company – $8,062.18 of that in interest. This calculation assumes you will only pay the minimum due during that time (1% of the balance plus interest and a minimum payment of $35) and that you will not add any additional debt to the account.

Credit Card Debt Limits Your Financial Options

Many of your financial decisions depend on your credit score, which is partly based on the amount of credit card debt you carry. High credit card balances increase your credit utilization ratio, lower your credit score, and make it harder to qualify for new credit cards and loans. This could mean it’s more difficult to buy a home or car when you’re ready.

Credit card debt also reduces your cash flow, making it harder to save for an emergency fund, invest for retirement, or afford large purchases, even if your credit score is sufficient to get loan approval.

Credit Card Debt Affects Your Mind and Body

Debt is a burden on your finances, and it can also take a mental toll. Researchers are finding a link between debt and our ability to think and make decisions. In one study, researchers found that people who were debt-free performed better on cognitive tests after receiving payments to reduce their debt. Debt can also harm us emotionally and physically. In another study, researchers linked high debt levels to depression, high perceived stress levels, and elevated blood pressure.

Next Steps and More Resources

The good news is that credit card debt can be resolved. If you’re here, you’ve already decided to do something about your debt. The next step is to find out how much you owe so you can create a plan to tackle it.

And if you’re still unsure about the risks of credit card debt, here are some additional warnings: from making your purchases more costly to restricting your financial freedom, learn about nine other reasons debt is bad. Learn more about the specific risks of credit card debt, as well as ways to mitigate or avoid it.

If you notice any of these signs indicating that your credit card debt is out of control, don’t despair. You can take control of your debt.

This article was updated on October 31, 2022, to correct the total amount paid to the credit card company in the first example.

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Sources:

– The Federal Reserve. “Consumer Credit – G.19.”

– Experian. “Credit Card Debt in 2020: Balances Decline for the First Time in Eight Years.”

– Qiyan Ong et al. “Improving Cognitive Functions and Decision-Making in the Poor through Debt Reduction.” PNAS.

– Elizabeth Sweet et al. “The High Cost of Debt: Financial Household Debt and Its Impact on Mental and Physical Health.” Social Science & Medicine.

Source: https://www.thebalancemoney.com/why-you-should-care-about-your-credit-card-debt-5093682

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