According to Bloomberg, in 2019, the global debt burden reached a staggering height of 244 trillion dollars. People are taking on a massive amount of debt and a major factor is high-interest credit card debt.
People are spending money they don’t have while racking up interest payments they simply cannot afford. The “buy now pay later” mentality is spiraling out of control, and many people end up feeling helpless and hopeless as they try to dig their way out of debt.
If you are one of the millions who has fallen into this treacherous high-interest credit card debt trap, read on to learn three ways to dig yourself out and take back control of your finances. I often remind my clients: I believe you control your finances; they don’t control you. When you’re in crushing debt, it feels like the opposite, but you can turn your situation around.
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Understanding the High-Interest Credit Card Debt Trap
There are several aspects of the credit card debt trap that I want you to be aware of before we explore the solutions to address your debt.
Credit DOES NOT Equal Cash
Often, people have the wrong attitude about their credit cards in relation to their spending. Someone with a $5000 credit limit may adopt the thought process they now have $5000 to spend when they need to, or worse, when they don’t.
What’s especially interesting is that it’s usually these same people who would be less likely to spend this same $5000 in the event they had the actual cash sitting in the bank.
We humans are interesting creatures. Our general mindset is that when we pay for something, we are much more inclined to slap down a credit card versus giving up our actual cash-in-hand.
Unfortunately, with factors like high credit card interest, we’re doing more damage than we may realize.
What Can You Do?
A better way to look at the situation is to imagine the same $5000 loan coming from a family member or friend. If you were borrowing money from someone close, you would automatically be more cautious about your spending.
That said, just remember, your family member or friend most likely won’t charge you high-interest on the money you borrow, while the credit card companies can (and WILL) charge you over 20%. Almost across the board, credit card interest is notoriously high, which is why debt often spirals out of control so quickly.
Interest is The Real Money Killer
High-interest credit cards are notorious for paving that long and lonely road to debt. If someone says to you, “I’ll give you $10 today if you give me $20 next week,” would you do it? Probably not.
However, in many cases, that is exactly what’s happening to those who incur high-interest credit card debt. For example, let’s go back to the case of the $5000 credit card:
Let’s be optimistic and say you have a credit card with a 15% interest rate, though this is typically on the lower end. If you are paying the industry average monthly minimum of 2% of your total balance, this equates to a monthly payment of $100.
So, let’s now also assume you’ve maxed the balance on this credit card at the $5000 credit limit, and you are making the $100 monthly minimum payment. It will take you approximately six years and seven months to pay off the entire $5000, or put another way, you will have paid an extra $2,906.30 in interest charges.
As a side note: the interest rate you’re charged is based on your overall credit score when you apply. Be sure to take advantage of any additional perks they might be throwing your way—as long as it’s a zero-net cost to you! Don’t get seduced by promises of airline miles and perks; if you carry a balance, your interest debt will almost always outweigh the benefits.
So How Do You Avoid Credit Card Interest?
There are a few things you can do to avoid falling prey to high-interest credit card rates. These include:
- Use Your Credit Card Sparingly – Make sure you are using your credit card only when you need to. If you know you’ll struggle to pay down your credit card after your next big purchase, save your cash instead, allowing you to be ready for that purchase. By doing this, it will definitely save you money in the long run.
- Shop Around – There are many credit card companies out there, all competing for your business. Take some time to find the one that is best for you and can offer the lowest interest rate possible.
- Pay Your Balance In Full – This one goes without saying, but a surprising amount of people just don’t do it. If you pay off your entire balance every month, you can’t be touched by interest.
As previously said, the more money you spend on your credit card, the more money you will owe in interest. This sets the stage for a downward spiral of debt and despair, and we all know that’s not a fun place to be.
The 3 Steps to Ending the High-Interest Credit Card Debt Trap
If you’re ready to start digging your way out of the high-interest credit card trap, it may feel daunting, but it’s more than possible. The sooner you get started, the sooner you’ll see real progress and a steady improvement in your financial situation.
Here are three steps to follow if you want to destroy your high-interest credit card debt and ensure it never comes back:
1. Pay Your Balance Off
If you’re tied down by debt, you must pay off your credit card before doing anything else. As illustrated in the example above, the longer you wait to pay off your credit card balance, the more interest you owe, and the more difficult it will be to dig yourself out of this hole.
That said, if working on your finances is one of your goals and you need a place to start, check out my guide on how to budget your monthly finances where you’ll find our Monthly Budget Workbook. This is a very comprehensive workbook that you will find helpful. And it’s a great tool because it shows you exactly where your money goes—even if you aren’t too sure!
From there, you can start to formulate a plan to free up money in your budget and put it toward paying down your debt.
Start by paying off your highest balance (or highest-interest) card first while paying the minimum due on the others. As you pay off one card, move the money toward the next card and the next. This is a fast way to see real progress on your credit card debt.
If you receive any bonus money (tax returns, monetary gifts, inheritances, or performance bonuses at work), use that money toward your debt until you’ve canceled it all out. It may take a while, but using this method, it will happen.
2. Start Saving
Once you are debt-free, or at least well on your way, you are now ready for the next step on your path to financial security. Part of that security comes from positioning yourself to never rely on credit cards again. Prepare for emergencies by making sure you have enough in your emergency fund to cover sudden unexpected expenses that would formerly have ended up on the credit card.
Once you have an emergency fund in place, you’ll want to start building your savings. At this point, a good savings strategy is to set aside the same amount of money each month you were previously using to pay down your debt. Because you did not have access to this money before, you won’t feel as though you’re missing it, making it not-so-difficult to put away.
Use low-risk savings strategies to ensure you’re maximizing your interest and building your savings as quickly as possible. Since there are many savings options to choose from, do your research. Create a snapshot of your monthly budget, which will help guide you as you progress.
As with any significant changes you may be considering in your life, take the time to find the tools to help you formulate your future game plan.
3. Invest So Interest Works in YOUR Favor
Now that you’ve established a savings account, you can begin to put your money to work in a way that really benefits you!
With your debt now paid off (or at least to a bare minimum), in addition to a savings account that’s much less anemic, it’s time to get your financial future organized. If you need a guide, follow my 6 Simple Steps to Get Financially Organized post. This comes with a complete checklist available in our Resource Library and is a great reference guide to develop over time.
Regardless of your choice of investments, there are a few tips you’ll want to consider:
- Do your research.
- Keep a cash reserve.
- Stay consistent in building your savings.
- Your new best friend is compound interest.
Commit to giving up credit cards, saving, and starting to invest your money so you can start reversing your financial tide.
Credit card debt is a major issue affecting millions of Americans each year. Many consumers are confused about the true nature of credit cards and the way high-interest debt accumulates over time. You don’t need to be one of them.
To avoid falling into the high-interest credit card trap:
- Understand credit does not equal cash.
- Be wary of interest, the precursor to debt.
- Deal with debt. Pay it off, start saving, invest your money.
If you implement these strategies, you’ll be able to stop credit card debt in its tracks and make your escape from the high-interest credit card debt trap!
If you’re ready to get financially organized or take your finances to the next level, I’m happy to schedule a consultation with you. Click here to learn more about my financial consultation services. Together, we will help you get control of your finances so that they won’t control you!