Here's What Happens When You Carry a Balance on Your Credit Card

While credit cards are a convenient way to pay, you should use them with care. Carrying a balance on your credit card can become an expensive problem. The best strategy to avoid debt is to pay your entire credit card balance off regularly. If you're only paying the minimum amount due, you're making a choice that could quickly become costly. Here's what you need to know.

Understanding how credit cards work

If you're new to using credit cards, you may wonder how credit cards work. When you swipe your credit card while making a purchase, you're borrowing money from your credit card issuer. Your credit card issuer will send you a bill for the purchases you made in the previous billing cycle.

Your bill will list your total balance for the latest statement closing date. Many consumers make the mistake of only paying the minimum amount due listed on their credit card bill instead of the total balance. But if you do this, you'll be charged interest on your unpaid card balance.

The danger of credit card debt

Anyone who uses credit cards needs to learn how credit card debt is charged. Each card has an annual percentage rate (APR), the total cost you'll pay yearly to borrow money from your credit card issuer. When you carry a balance on your card, your card issuer will charge interest fees based on your APR.

Credit card interest accumulates daily. That means if you continue to carry a balance, interest will continue to accrue -- leading to a more expensive problem. If you're not careful, credit card debt can quickly get out of hand and negatively impact your personal finances.

Do this to avoid credit card debt

If you want to take steps to avoid credit card debt, make sure you pay your balance off monthly. If you're considering using your credit card to finance a costly purchase, your best bet is to save money first. Stashing cash in a high-yield saving account, charging your credit card, and using your savings to pay the entire balance is the best way to avoid paying interest.

How to get out of credit card debt

You're not alone if you have credit card debt. The average American has $5,221 in credit card debt. Since credit card interest is calculated daily, paying your debt off sooner is ideal. If you have significant debt, you may want to consider using a balance transfer credit card to avoid additional debt while you pay off your existing balance. Balance transfer credit cards offer an introductory 0% interest rate for a set time.

You can transfer debt from an existing credit card to a balance transfer credit card and enjoy no interest during the promotional period, which could last 18 months or longer. While you'll likely pay a balance transfer fee of 3% to 5% on the transferred balance total, you can save a lot of money on interest charges using this kind of credit card.

If you have $2,500 in credit card debt and transfer it to a balance transfer credit card with a 5% fee, you'll pay $125 in fees, making your new total balance $2,625. If the card you choose offers 0% APR for 21 months, you'll have 21 months to pay off the entire card balance without being charged interest. Bear in mind, you'll need to pay $125 every month to pay off your balance during the promotional period.

Monitor your spending

Credit cards aren't all bad news. If you pay your balance off regularly, you can avoid costly debt. If you're new to using credit cards, you should closely monitor your spending habits to avoid debt. Budgeting apps make it easier to set spending limits and follow a budget. You can stay out of debt by only using your credit cards to pay for things you can afford.