What you need to know about credit card debt — and how to get out of it
Editor’s note: This is a recurring post, regularly updated with new information.
Here at TPG, we spend much of our time extolling the incredible value you can get from credit card rewards, whether you’re looking for free flights, hotel stays, or simply some cash back to pad your bottom line.
However, these recommendations all carry a huge asterisk: If you get into credit card debt, you’ll rapidly erase the value of any rewards you’ve earned and end up in a difficult financial situation.
Whether you’re currently in debt and looking for a way out or simply trying to understand how credit card debt works so you can avoid it, you’ve come to the right place. Today we’re going to take a deep dive through everything you need to know about credit card debt.
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What is credit card debt?
The biggest difference between a credit card and a debit card is that when you swipe your debit card, the money is instantly withdrawn from your bank account.
That’s not true with a credit card. Instead, at the end of every month, your card issuer will send you a bill for all the charges you made that billing cycle. If you pay your balance in full every month, you’ll never have to worry about racking up debt. But if you make only the minimum payment (or pay any amount below the full statement balance), you’ll start accruing interest.
Thankfully, there are strong consumer protection laws in the U.S. that require card issuers to help you understand the dangers of credit card debt. For example, my Marriott Bonvoy Business™ American Express® Card statement closed earlier this year with a balance of $375. I plan to pay the card off in full before my payment due date, but if I were to only make the minimum payment of $35, it would take me 16 months and cost me an extra $180 in interest charges to pay the card off.
One of the reasons credit card debt is especially dangerous is because of the astronomically high interest rates on unpaid balances, especially on the most rewarding cards. Other than credit cards, there are two common types of debt. The first is mortgages, where you’ll usually see interest rates in the 3-5% range, and the second is car loans where the national average interest rate is just over 5%.
By comparison, my Bonvoy Business Amex charges an interest rate that’s more than three times higher than on most other debt. Because debt compounds from month to month — meaning next month you’ll start paying interest on the interest you accrued this month — high-interest credit card debt can balloon very quickly if you aren’t careful and deliberate with your payments.
How to get out of credit card debt
There are plenty of tools you can use to your advantage, starting with autopay. Most major credit card issuers allow you to set up autopay on your accounts, meaning your bills will automatically be paid before the due date and you’ll never miss a payment. All you need to do is make sure to have enough money in your bank account to avoid overdraft fees.
Another option, especially as you start to add more credit cards from different issuers to your wallet, is to pay off all your balances every two weeks. This is the strategy I recommend to my friends who are just starting out in the world of travel rewards.
I have them set a recurring reminder on their calendar for the 1st and 15th of every month, and when that reminder pops up, they log in and pay off all their balances even if the statement hasn’t closed yet. Since you usually have about a month from the time your statement closes to the time your bill is due, this every-two-weeks method makes sure you stay ahead of your bills and never miss a payment.
No matter how you got there, if you find yourself dealing with credit card debt, it’s important to make a plan. Simply making the minimum payments every month isn’t good enough, and if you have a large amount of high-interest debt you might see the amount you owe continue to increase.
One great strategy to get out of debt is to open up a new credit card with a 0% intro APR offer or take advantage of balance transfer offers. The exact offers vary from card to card, but you can transfer your high-interest balance to this new card and pay it off over the course of 12-15 months without racking up any more interest.
Just make sure to pay off the balance before the 0% intro APR period expires or you’ll end up fighting an uphill battle against interest again. Unfortunately, many banks have removed their 0% intro APR offers during this pandemic induced recession as a way to minimize their risk.
If you have multiple credit cards to pay off and for some reason can’t or don’t want to consider a 0% intro APR card, there are two philosophies about how to attack debt.
The first is called the snowball method, because you start small and build. This strategy calls for making the minimum payment on all your debts and throwing any extra money at the smallest balance you have.
Then, once that’s paid off, you’ll shift those payments to the next smallest balance and so on as the snowball of paid-off debt continues to grow. This approach is nice because it lets you score some easy wins early on, but it’s not the cheapest approach mathematically.
The other option is the avalanche, where you make minimum payments on all your debts and throw any extra money you have at the highest-interest debt. This might extend the total amount of time that you’re in debt, but it has the advantage of saving you the maximum amount on interest. With math on one side and human psychology on the other, it’s up to you to decide which approach you’d rather follow, and perhaps more importantly, which plan you’ll have an easier time sticking to.
FAQs about credit card debt
There are a lot of questions and misconceptions surrounding credit card debt, and it’s important to be armed with facts when facing an expensive and important battle like this. If you have a question that isn’t answered here, feel free to ask it in the comment section and we’ll do our best to get you an answer.
What is the average credit card debt in the US?
It can be embarrassing and difficult to talk about money, especially when you’re dealing with debt, but you should know you’re not alone. The median credit card debt for U.S. households is $2,300. The average total debt is $5,700.
What happens to credit card debt when you die?
Unfortunately, credit card debt doesn’t just disappear when you die. The executor of your estate, whether it’s a lawyer or your heirs, will be responsible for paying off your debts using any assets you left behind. If you’re in a significant amount of debt, this could eat away at any inheritance you planned to leave to your family members.
Can you negotiate credit card debt?
Yes you can, and you absolutely should try negotiating for a lower interest rate, a lower monthly payment, or even a partial settlement. Credit card issuers have a strong incentive to collect the money you owe them, but they don’t want to push you into bankruptcy and risk not being able to collect anything.
There’s no guarantee you’ll be successful, and you may want to speak to a lawyer or CPA before starting the process, but this is a classic case of “it never hurts to ask.” Note that many card issuers have created special programs for people affected by COVID-19 to provide relief in their credit card payments.
It’s good to have a healthy fear of credit card debt, but it’s easy to stay out of debt if you’re responsible for your monthly payments. Even if you find yourself in debt, you have a number of different strategies you can use to pay off your balances before they get too big and expensive.
Additional reporting by Chris Dong.
Featured image by Isabelle Raphael /The Points Guy
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