If you talk to 10 adults, I’m willing to bet at least half will have a credit card they use on a regular basis. Getting a credit card has become a rite of passage into adulthood. Many young people can’t wait to get their hands on one. But although a credit card is useful in an emergency, the need for instant gratification can get us into trouble.
Some people don’t grasp the impact credit card debt can have on their lives. For many, this type of debt is nothing more than another bill in the budget. But as a type of revolving debt, credit card debt is different from other debts. So if you have an account—or if you’re thinking about getting one—proceed with caution.
Here are a few facts you might not realize about credit card debt.
1. The true cost of minimum payments
Credit card debt shouldn’t be viewed as another monthly expense. With any type of debt, you pay interest to a creditor or lender. In the case of credit card debt, the interest you pay can be considerably more than the interest on other types of debt, such as a car loan, an auto loan or a personal loan.
It’s not unusual for a credit card to have an interest rate in the double digits. The higher your interest rate, the more you pay when carrying a balance from month-to-month.
To illustrate, let’s say you have a $3,000 credit card balance and you’re paying 17 percent interest. If you’re making a $73 minimum payment, it’ll take approximately five years to pay off this debt. While paying off the debt, you’ll also pay an additional $4,500 in interest. That’s basically money flushed down the toilet. You’re putting cash in your credit card company’s hand when you could be saving for something importance, such as buying a house.
2. The average household has over $15,000 in credit card debt
Credit card debt is practically the norm in many households, so much so that many people don’t realize when their debt is out of control. Some people argue that a car loan or student debt can be just as high. While this is true, the main difference between credit card debt and these types of debt is the interest rate.
Car loans and student loans have much lower rates and fixed terms, which makes them easier to pay off. Credit cards are designed to keep you in debt for as long as possible.
3. Credit cards can prevent buying a house
Credit card debt can have a negative impact on your debt-to-income ratio, which is the percentage of your gross monthly income spent on debt payments each month.
When you apply for any type of loan, the lenders looks at your monthly gross income and your minimum debt payments. Typically, lenders prefer a debt-to-income ratio no greater than 45 percent. If you have high credit card balances and you’re paying $400 a month in minimum payments, this debt can push your debt-to-income ratio beyond an acceptable limit, which can disqualify you for loans.
It doesn’t matter if you have good enough credit or make your minimum payments on time every month. From a lender’s standpoint, the more debt you have, the harder it’ll be for you to repay a loan.
4. Creditors don’t accept partial payments
You might be shocked to learn that some creditors refuse to accept a partial payment. You either pay your bill in full, or you don’t pay at all. In some cases, you might be able to negotiate a reduced payment during a hardship, but there are no guarantees.
If you can’t pay a credit card bill and your account becomes more than 30 days past due, your credit card company reports the lateness to the credit bureaus. This negative information can reduce your credit score and remain on your credit report for up to seven years. Once your score drops, it becomes increasingly difficult to get other types of financing, and a lower rate can limit your job options and result in higher insurance premiums.
Getting a credit card can build your credit score, and if you don’t want to tie up your cash, using credit makes sense in certain situations. Just make sure you manage the card responsibly. If you don’t want to join the tens of thousands of households with $15,000 or more in credit card debt, only charge what you can afford and pay your balance in full every month.