Credit card ownership begins as a privilege — the ability to make purchases before providing the funds to pay for the purchases — but can quickly devolve into a web of bills that will eventually entangle your finances.
As of 2012, the average credit card debt for every American household is $15,590. The average debt per person is between $9,111 and $10,235.
Millions of consumers carry credit card debt, and this burden is carried regardless of age, race or credit card company affiliate. Most people aren’t dealing with a single credit card either, but carry an average of three cards. Learning how to manage this debt is a process that can consume your time and emotions.
Taking steps to overcome credit card debt is the only way to return to a place of financial security. For some, these steps must be taken with the assistance of a credit counselor. For others, a diligent effort to develop new habits will be rewarding. For all, the long-term repercussions of credit use will be reflected in credit scores that can help or hinder your financial future.
Who Has Credit Card Debt?
There are 160 million people in the United States with credit cards, ranging from Visa cards to department store cards and gas cards. Each card has a unique set of terms and sometimes rewards that accompany spending.
When you are approved for a card, you will sign an agreement for a set of terms, including:
- Interest rate charged on any balances
- Monthly minimum payments toward the balance
- Fees for missed or late payments
- Maximum amount of available credit
Using a credit card responsibly will provide access to capital otherwise not available. This financial asset enables consumers to make purchases before paychecks clear, afford large purchases that would normally be delayed, take out loans, lease vehicles, get approval for car payments, finance a house and act as a factor in the hiring process.
Credit availability is a double-edged sword as it gives consumers spending power – after the work to become a borrower worthy of the risk creditors take—and demands the responsibility to wield credit properly. If credit use is not managed, the resulting debt can be crippling. Many people recognize the gravity of credit card debt only when it seems insurmountable.
How Credit Card Debt Snowballs
Nearly half of credit card holders ages 18 to 59 always pay credit cards in full. However, credit users of all ages report occasionally participating in actions that if continually repeated, can potentially damage credit.
Common credit habits with serious negative repercussions include:
- Carrying a balance from month to month
- Paying only the minimum balance
- Owing fees for late payments
- Owing fees for exceeding credit line
- Using the card for a cash advance
Continuing a practice of making more purchases with your credit card, while only paying the minimum payments, will quickly grow your debt.
Emergencies trap people with debt. Sudden expenses come up and credit seems to be the solution. Unfortunately, the solution is only temporary, providing funds to cover one emergence or pay one extra bill, but leaving a hefty debt that is not easy to erase. Over time interest charges build on the owed balance and getting back in control seems impossible.
Trends in Credit Card Debt
Analyzing how credit is being used and abused in society involves looking at what types of cards people are using, how different age groups use credit and which cultural demographics are most struggling with debt.
Visa, store cards and Master Card comprise the largest numbers of cardholders. There are 107 million Visa cardholders carrying a total of $369 billion in debt; 96 million store cardholders have $94 billion in debt; and 84 million Master Card holders carry $255 billion in debt. While there are only 37 million American Express cardholders in the U.S., they hold $97 billion in debt.
Consumers age 65 and older have the greatest amount of debt. Credit card debt has also increased from generation to generation, as cardholders ages 28 to 33 have an average of $5,689 more in credit card debt than their parents did.
Student loan debt contributes to the increased credit card debt in this age group because most of their earnings are spent on student loans, leaving them to depend on their credit cards to supplement their income and daily expenses.
Once this generation reaches their 60s, they may face serious obstacles if their debt continues to grow.
The average amount of debt per individual from 2008 to 2012 has significantly decreased across multiple demographics. The African-American population experienced a 17 percent decrease in debt per person, non-Hispanic whites saw a 29.4 percent decrease, and debt among the Hispanic population dropped by 33 percent.
Managing Your Credit Card Debt
Getting out of credit card debt will take time and intentional steps. Setting a goal for when you plan to be debt-free can help you to move into a place of financial security. Set a reasonable date for when you want the money you’ve spent and the interest you’ve accrued to be paid off. Work toward this goal by taking these steps.
- Change your spending pattern
You will not be able to pay off credit card bills if you continue to spend beyond your means. Create a budget to help track and control the money you borrow. Cut back on unnecessary expenses, making sacrifices that will allow you to save money.
- Always Make Monthly Payments
The most basic principle of simply getting the money to your creditor can be the easiest to avoid. Making credit card payments a low priority will make this problem grow. Make it a habit to immediately take money from your paycheck and send it to your creditors.
- Always Pay on Time
Ignoring due dates has a price. You will be subject to fees for each occurrence and possibly charged a higher interest rate. Keep a calendar and pay attention to any communications—calls, emails, letters—from your creditors.
- Increase your monthly payments to more than the minimum owed
Handling a large portion of debt requires paying more than the monthly minimum. Start with increasing your payments by even a small percentage and then make bigger strides by using your tax refund, cash gifts or bonuses towards paying off the debt.
- Take drastic measure and stop using credit cards until you are financially stable
If you keep adding to your balance and running into minimum payments you can’t afford, it might be time to cut your card up and destroy the temptation.
- Meet with credit counselors to get help making a plan of action
Regaining financial control on your own is difficult. Seeking help may be the route you need to take. Speak with a credit counselor who can assist you in making a plan that both works and realistically address financial needs. If you qualify, you can enroll in a debt management plan that will reduce your interest rates and your monthly payment.
What Does My Credit Score Mean?
Part of having a holistic understanding of credit cards requires knowing the value and function of credit reports. The three main credit agencies that put together credit reports are Equifax, Experian and TransUnion. You can request a free report from each of these bureaus every year.
People with scores ranging from 300 to 549 are considered high-risk borrowers. Having these scores makes it difficult to get approval for lines or credit, loans or financing for a house. If lenders do extend you credit, it will likely be at subprime interest rates, which means you will be paying for the risk you pose. This lower score can also be a factor that potential employers will weigh when considering you for a new position.
Around 16 percent of Americans have scores in this range.
Mid-range to Higher Scores
People with scores ranging from 550 to 649 are moderately high-risk borrowers. Because these scores still have room for improvement, interest rates will still be high and lines of credit low. Around 20 percent of Americans have scores in this range.
The national average credit score is around 660.
Consumers considered good investments for lenders are those with scores ranging from 650 to 799. Since borrowers with these scores have few flaws in their credit history, only missed payments here and there or a high credit ratio, they are eligible for competitive interest rates.
People with scores in the 800 to 850 range are an excellent investment for lenders. Borrowers in this range can take out a loan, purchase a car or finance a house with ease. They are eligible for the lowest available interest rates. As borrowers utilize the credit they’ve earned, it is important that they continue to maintain good habits, especially as the simple access to large sums of money comes with heightened responsibility.