How does yours compare?
Though carrying a credit card balance is, unfortunately, a common habit among Americans as a whole, it's a dangerous thing to do for a few key reasons. First, when you fail to pay your credit card bill in full, you're automatically forking over interest. That's money you're effectively wasting rather than using for important purposes, like padding your savings account or socking away for a down payment on a home.
Secondly, too much credit card debt could cause your credit score to tank. Of the various factors that go into calculating a credit score, utilization carries the second most weight after your payment history. Credit utilization is the extent to which you're using your available credit limit, while your payment history speaks to how well you pay your bills on time. A utilization ratio that exceeds 30% could hurt your credit score, which means that if you're working with a $5,000 credit limit, owing more than $1,500 at once becomes dangerous.
But the average millennial today owes way more than $1,500. In fact, according to credit bureau Experian, as of the fourth quarter of 2018, millennials had an average credit card balance of $5,231.
That's not a small amount of money, and to give you a sense of what it might mean in terms of wasted cash, consider this: If you owe $5,231 on a credit card with a 20% APR, and it takes you three years to pay off that balance, you'll wind up throwing away $1,767.50 in interest. That's a lot of cash to forgo needlessly.
If you're carrying a credit card balance that's close to what the typical millennial owes, consider this your wakeup call to start paying off that debt immediately. The sooner you do, the less money you'll waste, and the quicker your credit score can climb.
Shedding your debt
The best way to pay off credit card debt, or any kind of debt, for that matter, is to get on a tight budget so you're fully aware of where your money goes month after month. Once you have your budget set up, you can go through your various spending categories, identify those you're able to cut back on, and start making serious changes that free up cash.
Some of those changes may be more extreme than others. For example, if you owe a lot of money in credit card debt, you may decide to pack up and move to a smaller apartment. If you owe a couple of thousand dollars, cutting back on restaurant meals, entertainment, cable, and rideshares for a year may do the trick.
In addition to following a budget and curbing your spending, look into getting a side job on top of your main one. Since the money from it won't be earmarked for ongoing bills, you'll have the option to use all of it, minus what you owe in taxes, to chip away at your credit card balance.
Don't let that debt fester
You might think carrying a credit card balance is no big deal, but actually, it's a troubling habit you should make every effort to kick, both to avoid wasting money and preserve your credit score. Though it's common for Americans across all generations to owe money on a credit card, that's really not a bandwagon you want to jump on. And if paying off your debt quickly -- or avoiding debt altogether -- makes you an outlier, so be it.
Alert: highest cash back card we've seen now has 0% intro APR until nearly 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.