by Dan Caplinger | Dec. 13, 2018
Credit cards are tools, and it's up to cardholders to decide the best way to use them. Unfortunately, there's a lot of evidence that many cardholders don't handle their cards particularly well, with recent figures suggesting that roughly 60 million American households regularly have outstanding credit card balances that are rapidly approaching the $1 trillion mark in total.
Once you've built up debt, it can be tough to figure out how to pay off credit card balances fast. Yet the more important question is how people accumulate those high card balances in the first place. Here are some of the most common reasons why people end up with credit card debt.
The most obvious reason why people get into debt is also the simplest: Credit cards make it possible for people to outspend their earnings. If you pay for everything with cash, then the size of your paycheck is the ultimate limit on how much you can spend.
Cards can be useful tools to help you with the timing of your spending compared to when you get paid, as the flexibility that credit card grace periods offer can give you some leeway in when you buy necessary items. But to avoid debt, it's critical not to spend more than you make on a credit card. Too many people fail to exercise that restraint, and that's what gets them in trouble.
When it comes to your finances, unexpected things can cause big problems. Unplanned events like needing a car or home repair can cost you hundreds of dollars, and most people don't have that kind of money on hand. Charging those costs is the obvious answer, but that doesn't make it any easier to pay them off at the end of the month.
Having an emergency fund is a crucial safeguard against the debt trap that unexpected financial problems can cause or a 0% APR credit card can help you temporarily avoid interest charges. By having that savings cushion available, you'll be able to avoid building up credit card debt that you can't pay off immediately.
Credit card companies are smart, giving customers cash back and other perks in exchange for using their cards. But what most people don't understand is that the value of the rewards they get is almost always less than the interest and finance charges that they'll have to pay if they carry a balance.
Overspending to get a card reward is never a good idea. If you can't pay off the balance on a rewards card every month, then don't fall for the card in the first place. The best way to use rewards cards is on spending that you'd do anyway.
There's a big misunderstanding among many cardholders that as long as they make the minimum payment, they're fine. It's true that paying the minimum is enough to avoid the fees that credit cards charge when you don't make a payment on time. However, it can take years to pay down a credit card balance if you only make minimum payments, because those minimums are often just barely enough to cover the interest charges.
Even if you can't pay off your balance in full every month, your goal should be to do so as soon as possible. Make payments that are as big as you can afford, and it'll help you get out of debt more quickly.
It's easy to get multiple credit cards, and the more cards you have, the harder it is to keep track of all of them. If you aren't good at managing all of your cards, then mistakes can lead to missed payments that incur expensive late payment fees, getting you into even more trouble.
Make sure you have only as many cards as you can manage effectively. Just because you can have more cards doesn't mean that they'll do you any good -- and often, having them can get you into trouble.
Despite all the reasons why people get into credit card debt, you have to be able to avoid falling into these common traps if you want to use your cards effectively. Only by paying off balances in full will you be best able to manage your finances well and use cards as the powerful financial tools they can be.
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