Credit card debt can really sneak up on you, especially if you’re carrying a balance from month to month. Thanks to compounding interest, the amount you thought you owed can quickly grow as interest accumulates exponentially. It’s little wonder then that the average amount of credit card debt for American families carrying balances was $9,333 as of April 2020.
If you’re scratching your head each time a credit card statement arrives — wondering how in the world you’re going to pay it down — start by avoiding these four financial mistakes that can inadvertently fuel credit card debt over time.
Operating Without an Updated Budget
While a majority of Americans do use a budget in some form, there’s more to the equation — like updating your budget to reflect the absolute accuracy of your current financial situation. Income and expenses tend to change. Failing to update your budget to reflect a slight change in earnings or expenditures will render it inaccurate. You need to be able to see, at a glance, exactly what you’re spending in each category vs. what you’re bringing in.
If maintaining a spreadsheet budget feels tedious, try a simple expense-tracking app that syncs up with your bank accounts. The app will do most of the heavy lifting for you, all you have to do is get it set up and monitor your activity regularly.
Lacking an Emergency Fund for Unexpected Bills
More than one-fourth (28 percent) of adults in the U.S. lack emergency savings. Another one-fourth of Americans do have some “rainy day” funds set aside, but not enough to cover the recommended three months’ worth of living costs.
It’s safe to assume unexpected expenses will rear their heads at some point —be they medical bills, vehicle breakdowns, family emergencies, vet visits, job loss or the like. Without an adequate emergency fund, you may have to finance these situations using credit, which can easily worsen your cycle of credit card debt.
Hardships like these can mean the difference between getting your financial situation under control and seeing your debt spiral out of hand. Case in point: Many people have described in Freedom Debt Relief reviews how it became impossible to pay back existing debts on their own following a divorce, the death of a spouse or loss of income. Oftentimes, people in this position must choose between strategies like debt settlement — which involves negotiating with creditors to reach a more financially feasible agreement — or bankruptcy.
The takeaway? What starts out as manageable credit card debt can quickly become unmanageable when you factor in unexpected financial catastrophes. Having an emergency fund is your first line of defense.
Paying Only the Monthly Minimum on Bills
Every credit card statement displays the full balance due and the minimum acceptable payment amount. Remitting the minimum balance may seem less stressful — after all, it’s just a small percentage of the outstanding balance. But you’ll actually be giving interest the ability to flourish in the background. This, in turn, lengthens the amount of time it’ll take to pay back what you owe and means you’ll pay much more over the lifespan of the account.
Maintaining a High Credit Utilization Ratio
It might seem counter intuitive to learn the fact you can max out your credit card doesn’t mean you should. Your credit utilization ratio measures how much available credit you’re actually using. To keep your credit score as high as possible, it’s prudent to keep this figure below 30 percent. You can calculate your utilization ratio per card and total across all accounts by dividing credit used by credit limit.
There are two primary benefits to keeping an eye on your credit utilization ratio. First, you’ll avoid itching your cards toward their upper limits. It’s a good reminder to keep spending in check and pay down those balances as aggressively as possible. Second, your credit score, which factors in credit utilization ratio, will look better because you’ll appear less risky to borrowers.
Avoiding these four financial mistakes can help you keep your credit card debt in check over time.