Hidden ways credit card debt can cost you money
Editor's Note
Whether you’re new to the credit card rewards space or you're a seasoned pro, there’s a cardinal rule that every rewards enthusiast should follow: It’s essential to pay off your card balance each month.
When you carry an outstanding credit card balance from one month to the next, it doesn’t take long for the interest charges you pay to wipe out the value of any rewards you might earn. High interest rates make carrying credit card debt from one month into the next incredibly expensive.
The average annual percentage rate on a credit card was over 22% for interest-assessing accounts at the end of 2024, according to the Federal Reserve, with some cardholders paying higher-than-average interest rates — think 30%-plus in some cases — depending on their creditworthiness and the type of account they open.
High-interest charges are the most obvious way credit card debt could cost you money, and there are less apparent ways that poor credit card management habits could come back to haunt your wallet as well.
Here’s what you need to know, along with tips on keeping your credit and money safe.
Credit card debt and your credit score
Credit utilization — the percentage of available credit you’re using on a credit card account — is a major factor that contributes to 30% of your FICO score. Therefore, the credit card debt you carry (or the lack thereof) can heavily influence your credit score.
Some financial experts recommend keeping your utilization rate below 30% to avoid credit problems. Yet, in reality, even lower credit utilization is better than that. There’s no such thing as a “perfect” credit utilization rate. However, FICO research shows that consumers with the highest credit scores use 7% of their credit card limits, on average.
TPG credit card writer Danyal Ahmed hardly has a credit utilization over 10% month to month, and this positively affects his credit score.
No matter how much you charge on your credit card account during the month, paying your bill on time and in full every month is important. Paying off your full credit card balance is TPG’s top credit card commandment. If you don’t follow these rules and let the balances and utilization rates on your credit cards increase, your credit score may decline.
Related: How long can negative information hurt your credit score?
The cost of a lower credit score
Lenders, credit card companies, and many other businesses rely on credit scores to predict risk. In general, consumers with the highest credit scores have access to the lowest interest rates on loans, credit cards and other financing products. Good credit could even help you save money on things like auto insurance and apartment lease deposits.
If you carry debt on your credit card accounts and a higher utilization rate triggers a drop in your credit score, you could face expensive financial consequences in the future. Below are two examples of how a lower credit score (from a higher credit card utilization rate or credit report factors) might cost you.
Buying a house
If you use your credit cards wisely, they can help you build credit and perhaps put you in a better position when you’re preparing to buy a house. But if you run up a large amount of credit card debt, those same accounts could damage your credit score and make it more difficult to qualify for an affordable home loan.
Below is an estimate that shows how much extra you might have to pay on a $400,000 mortgage over 30 years if you have a 620 FICO score versus a 720 FICO score, according to the myFICO Loan Savings Calculator:
| FICO® score | 620 | 720 |
|---|---|---|
APR | 7.854% | 7.425% |
Monthly payment | $2,894 | $2,776 |
Total interest | $642,002 | $599,482 |
In this example, having a higher credit score could save you:
- $118 per month
- $1,416 per year
- $42,520 over the life of the loan
Financing a car
Let’s consider another situation where having a lower credit score could cost you money: financing a vehicle. Again, if you revolve outstanding balances on your credit cards, there’s a good chance you will damage your credit score. If your credit score is lower because you’re in credit card debt, it can cost you extra money when you need to borrow money.
Here’s an estimate that demonstrates how much more it might cost you to take out a $30,000 auto loan over five years with that same 620 vs. 720 credit score, according to the myFICO Loan Savings Calculator:
| FICO® score | 620 | 720 |
|---|---|---|
APR | 12.664% | 6.818% |
Monthly payment | $677 | $591 |
Total interest | $10,646 | $5,488 |
Based on the example above, the lower credit score would cost you an additional:
- $86 per month
- $1,032 per year
- $5,158 over the life of the loan
Tips for paying down your credit card debt
There’s no question that carrying credit card debt is expensive — both in obvious and less obvious ways. So, if you’re struggling with credit card balances that you can’t afford to pay off all at once, it’s important to create a plan to start dealing with your debt sooner rather than later.
Create a budget
Unless you’re bouncing back from a short-term financial disaster, the source of credit card debt might have to do with your budget. No matter how much or how little income you earn, if you spend more money than you make, it’s easy to create a debt problem.
A budget can help you map out your financial goals and priorities. It can also help you create a plan to use your credit cards responsibly and manage your spending on multiple accounts. These steps can help you enjoy the benefits your credit cards offer without wasting money on interest and potentially damaging your credit score.
Related: Staying organized: The best apps for money management
Make a debt elimination plan
Once you have a budget to track your spending, it’s important to create a plan to pay down your existing credit card debt. Here are two popular strategies:
- Debt snowball method: List out your credit card debt from the lowest balance to the highest. From there, apply all the extra funds available in your budget toward the account with the lowest balance and repeat until you eliminate all your debt.
- Debt avalanche method: List your credit card debt in order of the interest rates you’re paying, from highest to lowest. All extra cash should go toward paying off the credit card with the highest interest rate. Once that account has a zero balance, move on to the credit card with the next highest APR and repeat until you pay off all your debt.
The debt snowball method could lower your credit utilization rates faster, saving you money in the long run. The debt avalanche method eliminates your current high-interest debts first, resulting in more immediate savings.
Consider debt consolidation
For many people, paying down credit card debt takes time. If your credit is in decent shape, you might consider consolidating your debt to potentially speed up your debt elimination efforts.
Two popular ways to consolidate debt are balance transfer credit cards and personal loans. If you can qualify for a lower interest rate, either option might save you money. Remember, it’s essential to avoid overspending in the future for this method to help rather than hurt you in the long run.
Bottom line
Carrying credit card debt can negatively affect credit scores, leading to higher interest rates on loans and credit cards. High-interest charges can wipe out the value of any rewards earned.
To deal with credit card debt, create a budget to track expenses and see where you can cut down to save money. In addition, consider developing a plan to pay off high-interest debt or seek debt consolidation to bring all your outstanding balances together, which can be paid off in an easier manner.
Related: Best balance transfer credit cards
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- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
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- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
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- Terms Apply.
Rewards Rate
| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
| 2X | Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com. |
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Intro Offer
You may be eligible for as high as 100,000 Membership Rewards® Points after spending $6,000 in eligible purchases on your new Card in your first 6 months of Membership. Welcome offers vary and you may not be eligible for an offer.As High As 100,000 points. Find Out Your Offer.Annual Fee
$325Recommended Credit
Credit ranges are a variation of FICO® Score 8, one of many types of credit scores lenders may use when considering your credit card application.Excellent to Good
Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.