More than half of all U.S. adults who have credit cards say they also have debt. Collectively, American households increased their credit card debt by $26 billion in the last quarter of 2018 — this represented the largest growth by category of debt. The takeaway here? Credit card debt is both common and on the rise.
There’s nothing inherently wrong with having a credit card by any means. Or two. Or three. Credit cards can be useful for building your credit rating, earning rewards for money you’ve spent and breaking large purchases into more manageable payments. However, serious problems can arise when you start carrying balances larger than you’re able to pay off in a timely manner. Many people have had the unfortunate experience of getting caught up in a seemingly endless cycle of credit card debt.
Here are four dangers associated with credit card debt.
It’s Easy to Apply for New Credit
If you have a mailbox, you’ve probably received at least one glossy envelope practically screaming at you to look over the exciting offer inside: “You’ve been pre-approved for this amazing credit card! Here are all the rewards and features you’ll love! All you have to do is fill out a simple form.”
The fact of the matter is it’s easier than ever before to apply for new credit. Whether you get approved or not will depend on factors like your credit score, of course, but there are credit options for a wide range of situations.
Simplified access to new lines of credit may be convenient, but it can also lead to trouble if you get into the habit of taking on more and more credit.
Credit Cards Have High Interest Rates
Credit cards tend to carry high interest rates — and that interest keeps compounding, which means any balance carried over from month to month and prior interest keep accumulating new interest.
According to WalletHub, new credit offers have an average interest rate of 19.21 percent while existing accounts average 15.10 percent. However, some cards — particularly store cards and cards approved for people with average or low credit — can carry higher interest rates, sometimes upwards of 25 percent.
Paying the Minimum Can Trap You in Debt
Credit cards allow cardholders to make a minimum payment rather than paying the balance in full. The minimum amount due is generally either a small percentage of the total balance (like 1-2 percent) or a small flat fee (like $25). While paying the minimum will help you avoid late fees and collections, it often goes toward paying interest rather than bringing down your balance.
What happens when you get trapped in a cycle of paying the minimum due or less? It will take much longer to repay your balance and you’ll end up paying much more in interest. As many Freedom Debt Relief reviews will attest, breaking the ongoing “minimum payment trap” can be very difficult and may even require a solution like debt settlement or consolidation.
Credit Cards Can Become a False Safety Net
Credit card debt can be particularly dangerous because it tends to be easy to accumulate yet ultimately costly. This is particularly true when credit cards take the place of a safety net — like an emergency fund. As it stands, nearly three out of 10 U.S. adults lack emergency savings, which makes them vulnerable to covering unexpected expenses with credit.
Credit cards may inadvertently become a false safety net against everything from medical bills to car troubles. But these tools offer only momentary relief; cardholders will still have to pay back everything they charge with interest. The vast majority of people with out of control financial obligations have stumbled into one or more of these four dangers of credit card debt.