$6,829. That is the average U.S. household credit card debt balance according to NerdWallet’s annual analysis of U.S. household debt. The plastic card has its perks such as cash back, points towards flights, or even first pick at Beyonce tickets. But this plastic card could easily get us in trouble if we start using it like its our own money. If we are being honest, we have all looked at our credit card bill and asked ourselves “i spent xxx on that?!” There are also scenarios where the unexpected happens. If we don’t have the savings to cover it, we place it on the card anticipating to pay it off the following month.  But in a lot of cases, we end up just paying the minimum balance due to other financial obligations.

In either scenario, it doesn’t help that the national Annual Percentage Rate (APR) is around 18%. Think of APR as the full amount you will pay for a loan over the course of one year. It includes any fees you may need to pay, plus the interest rate a lender applies to your particular loan. As such, APR has a huge impact on the actual amount that you owe on the credit card balance. If one only pays the minimum balance on the credit card, that purchase will end up costing a lot more than the original price paid just because of interest. Consequently, we end up in this cycle of debt due to compounding interest which isn’t helped by the continuous use of the credit card.

Just to put this into perspective, I have an example for you. Let’s say an individual owes $1,000 on their credit card, 18% APR and only makes the minimum payment of $25 per month. According to Credit Karma’s Debt Repayment calculator, the individual would end up paying $539 in interest and take 62 months to pay this off. If you don’t believe me, I have attached a screenshot from Credit Karma just to show you all. Not to mention, this calculation assumes that the individual is not continuing to use the credit card.

Eye opening right? This is one of the many reasons individuals get caught up in the never ending debt cycle. Although it might seem a little scary, there are several things that we can all try to implement to proactively avoid the downfalls of credit card use.

1. Pay more than the minimum if you can. This will ultimately cut down on the amount of interest you owe and the time it takes you to pay off the credit card. 

2. Think twice before swiping your credit card aimlessly. Practicing this will help you avoid using your credit card for impulse purchases. 

3. Create an emergency fund for those unexpected expenses (i.e. tire replacement, medical bill). Having money set aside could save us hundreds of dollars of interest by having the ability to pay cash instead of borrowing money. 

As always, I want to hear from you! What is your current APR on your credit card(s)? What are some things you currently do or plan to do to cut down on credit card debt? Feel free to use the comment section below to join the conversation!

Holding you accountable, 

DWM