In today's fast-paced world, credit cards have become an essential financial tool for many Americans. While they offer convenience, rewards, and flexibility, their misuse can lead to significant debt and financial strain. This blog post will dive deep into understanding credit card debt, how it affects your life, and the best steps you can take to manage and reduce it effectively. Plus, we’ll explain how you double-check your credit score.
What's Credit Card Debt?
Credit card debt happens when a cardholder borrows funds from a credit card issuer and doesn't pay back the full balance by the due date. Over time, as interest flows in over time on the outstanding balance, this can lead to a growing financial burden.
Causes of Credit Card Debt
While each person’s situation is unique, several common factors lead to increasing credit card debt:
Unexpected emergencies: Medical emergencies, home repairs, or sudden unemployment can lead to unplanned expenses.
Impulsive spending: Uncontrolled and frequent shopping sprees can quickly rack up big balances.
Lack of financial literacy: Not understanding how interest rates and minimum payments work can lead to uninformed decisions.
In 2023, we have now reached $1 Trillion in national credit card debt. This stat alone shows how important it is for us to know how to manage our credit cards, as we are seeing a rising trend in everyone using them more often.
How Does Credit Card Interest Work?
Understanding how credit card interest works is vital in managing and reducing your debt.
What’s Credit Card Interest?
Credit card interest is the price you pay for borrowing money. It's calculated based on the card's APR (Annual Percentage Rate) and your outstanding balance. When you carry a balance past your card's due date, the issuer (usually a bank) calculates interest on that amount. It's compounded daily, meaning you're charged interest on the previous day's interest too. The main reason you don’t want credit card debt is because it’s using the law of compounding against you.
What’s a Good Interest Rate for a Credit Card?
Typically, a good APR is below 10%. However, this can vary based on your creditworthiness and the type of card you’re trying to get.
Do You Get Charged Interest if You Pay the Minimum?
Yes. Paying only the minimum means you'll be charged interest on the remaining balance, increasing your overall debt.
Strategies to Overcome Credit Card Debt
Overcoming credit card debt requires a combination of determination, strategy, and sometimes external guidance. Paying off credit card debt is a step-by-step process:
Assess your situation: Understand how much you owe, to whom, and at what interest rates.
Prioritize your debts: Focus on high-interest debts first, or consider consolidating multiple debts.
Create a budget: Allocate specific amounts for debt repayment, ensuring you live within your means. A detailed budget can help you track expenses and ensure you live within your means.
Once you do these three things, you can pick a strategy that can help you pay off your debt over time.
Methods for Paying Off Debt
Different strategies work for different people based on their individual financial situations:
The Avalanche Method: This method focuses on paying off debts with the highest interest rates first, minimizing the overall interest you pay.
The Snowball Method: Here, you start by paying off the smallest debts first, giving you psychological wins, and motivating you to tackle bigger debts later.
Lump Sum Method: Here you pay the minimum amount on each credit card month-over-month while saving a separate portion of your income to pay off your cards using lump sum payments (total amount due).
No one method is foolproof and you may end up trying more than one method before finding success.
Other Solutions for Tackling Credit Card Debt
Managing credit card debt involves a combination of budgeting, smart financial choices, and sometimes external help:
Debt consolidation: You have the option of combining different lines of debt that you have (including credit card debt) into a single payment, which can help if it’s also at a lower interest rate.
Credit counseling: Professional counselors can offer advice and create a debt management plan tailored for you. Sometimes you don’t need to make the plan by yourself.
Balance transfer cards: These offer low or 0% interest rates for a promotional period, allowing you to pay off debt faster. Just remember to read the fine print of the promotional period so you know how your interest rate will change.
Emergency funds: Saving for unforeseen expenses can prevent the need to rely on credit cards.
Settling your credit card debt: This is when a creditor agrees to cancel a portion of your debt. However, this can have tax implications and may affect your credit score.
How Debt Affects Your Credit Score
Now you may already know this, but we won’t assume context—your debt damages your credit score if you can’t manage it correctly. Your credit score is a reflection of your financial behavior, and outstanding debts can heavily influence what you can purchase in the future if you’re using credit instead of cash.
When Does Debt Fall Off Your Credit Report?
Typically, most negative debt information, like late payments or defaults, falls off your report after seven years.
How Long Does Debt Stay on Your Credit Report?
This varies. For instance, bankruptcies can remain for up to 10 years, while inquiries stay for two years.
Do I Still Have to Pay a Debt That Fell Off My Credit Report?
While it may not affect your credit score, the obligation to repay the debt still exists. Creditors might still pursue collection or legal action.
How Long Do Collections Stay on Your Credit Report?
Generally, collection accounts remain on your report for seven years from the date of the original delinquency.
Can You Ask Creditors to Report Paid Debts?
Yes, if you've settled or paid off a debt, you can request creditors to update this status. Some may also agree to a "pay for delete" arrangement, where they remove the negative mark in exchange for payment.
How To Make Sure Your Credit Score Is Accurate & How To Fix It If It Isn’t
An accurate credit score isn’t always guaranteed
In a perfect world, growing your credit score would be easy. You’d get a line of credit, use it to purchase goods or services you need, and then you’d pay off your debt over time. However, sometimes you might face a challenge that isn’t really uncommon: having an inaccurate credit score.
A recent lawsuit against Equifax showed that “coding issues” resulted in more than 300,000 Americans having their credit scores negatively impacted by about 25 points (for those who applied for loans between March 17 and April 6 of 2022).
This highlights a problem that some of us will face in the future, whether we are using our credit responsibly or not.
And what’s worrisome is that incidents like these have happened before! Just last year, more than 1/3 of Americans found errors in their credit reports (according to CNBC). Whether it be mistakes from Equifax or the other 2 credit bureaus in charge of tracking our credit reports, it's important that we stay on top of the ball and make sure we do regular checks to ensure our scores are always accurate.
What happens if you don’t check your credit score?
Having a bad credit score can make your life difficult. With a bad credit score, you'll see higher interest rates whenever you apply for a loan, some banks may deny your applications for credit cards, and certain landlords will even deny you as a tenant! A bad credit score can also affect your car insurance rates, as it is a factor that most insurance carriers use to measure your potential risk as a customer.
Let’s not forget to mention that collections, late payments, and high utilization rates on your lines of credit can all contribute to a bad credit score. The last thing we should be worrying about on top of all these factors is whether or not our credit bureaus are accurately reporting our scores. Yet, at the end of the day, we're ultimately responsible for making sure our scores reflect how we're actually using debt.
How to check if your credit score is incorrect
Although there is no specific method you can use to verify if something is incorrect on your credit report, there are a few things you should keep in mind. In big incidents like the one that just recently happened with Equifax, your bank (or associated lenders) will contact you directly to help you with your case. The chances of you being affected by big incidents like these are higher if you’ve recently applied for a new line of credit.
Another thing you can do is make sure you’re on top of all of your transactions, especially those on your personal credit cards. Budgeting tools like Mint from Intuit can help you monitor your transactions over time and most banks provide online options to see your bank statements. Contact your bank immediately the moment you see any transactions that are unfamiliar.
Lastly, you can contact any of the 3 credit bureaus directly.
How to contact all 3 credit bureaus
You can use the contact information below* to contact any of the 3 credit bureaus to dispute a potential error on your report:
*This information was last updated on August 2023.
Want to know what to say? Try this!
Contacting a credit bureau can be intimidating. You won’t have enough information to know with 100% certainty that there is an actual error on your report, but in the case that you want to dispute anything you can use the following script when calling any of the credit bureaus:
“I am promised accuracy on my report based on federal law. I am making this call as another attempt to have any errors corrected on my consumer report, based on 15 U.S. Code § 1681. All verified information shows inaccuracies in my report must be promptly removed. As you can see in your system that you didn’t verify this information, it should be removed.”
Shoutout toThe Clever Credit Guy for sharing the script above via TikTok (we made some slight edits to it)!
And again, don’t forget to be persistent and try calling the credit bureau multiple times. There's no guarantee that they'll update your record, but if you’re certain that you have any incorrect information on your report, you have to try fixing it!
You’re going to want to always double-check your credit scores among all three bureaus on a regular basis (at least twice a year). Don’t just rely on the score you get from one specific company or tool.
Check Equifax, TransUnion, and Experian to see if there are any big differences that you want to dig into. If there is anything that seems suspicious or inaccurate, make sure you contact the credit bureaus to confirm.
Also, don’t forget that there are a ton of free tools out there that can give you alerts whenever your credit score changes (Credit Karma is a great example).
Guarding Your Financial Future
Let's keep it simple: credit card debt can sneak up on you, and before you know it, you're in deep. Maybe it was that online shopping spree, a few unexpected bills, or just life happening. But hey, there's good news! With tricks like the Avalanche or Snowball methods, some tight budgeting, and maybe even a bit of debt forgiveness, you can dig your way out.
But getting rid of debt isn't the end of the story. Your credit score, that magic number that can make or break big life decisions, remembers all those debts. And guess what? Sometimes, credit bureaus mess up. That's why it's on us to check our scores, call out mistakes, and keep an eye on our financial game. Whether it's dealing with debt or making sure your score is on point, stay informed, stay chill, and you've got this.
Other Frequently Asked Questions About Credit Cards
Why Pay Your Balance in Full?
Consistently paying your full balance helps maintain a healthy credit score and avoids unnecessary interest charges.
How Much Is Interest on a Credit Card?
The amount varies based on your card's APR and your outstanding balance. Always check your statement or contact your issuer for specifics.
How Do You Avoid Paying Interest on a Credit Card?
To avoid interest, pay off your statement balance in full and on time each month.