Credit card debt: what to know and how to stay in charge

Credit cards can be a helpful tool, sure, but they are also notorious for leading to long-term debt. Most adults in the U.S. have a credit card, but as far as we know, none of those cards came with an instruction manual. 

No matter what your experience is with credit cards, for most of us, there’s always more to learn. You might have used your credit cards for years and want to make sure you're on the right track. Or maybe you're just starting out and wondering what red flags to look for. Let’s dive into how credit cards work, how to use them wisely, and how to avoid common pitfalls.

What is credit card debt? 

Credit card debt is the money you owe to a credit card company (or companies, if you have more than one card). When you use a credit card, the credit card company pays on your behalf. Then, you pay that money back to the credit card company, sometimes with interest.

Related: 5 ways to pay off credit card debt

How credit card debt works

A credit card is a revolving credit line. Here's what that means. 

• Your credit card has a set credit limit of available funds.

• As you charge things to your card, your available credit shrinks.

• When you make a payment against your balance, that frees up available credit. 

• You can charge, repay, and charge more, pretty much indefinitely as long as your account is in good standing.

Say you have a credit card with a $5,000 limit. You charge $2,500 to the card for concert tickets, plus another $300 for groceries. 

You now owe $2,800 in credit card debt. Most credit cards have a grace period before they charge interest on your balance, usually ending on the payment due date. If you don’t pay off the balance by that date, or if your account doesn’t have a grace period, you’ll owe interest in addition to the amount of your transactions. Meanwhile, your available credit is now $2,200. 

Your credit card issuer will require that you make at least a minimum payment each month against the balance that you owe. This minimum payment is typically either a set dollar amount or a percentage of the balance, whichever is greater. 

Unless you have a special zero-percent promotional annual percentage rate (APR), such as on a new balance transfer credit card account, your card issuer will charge you interest when you carry a balance. If you pay more than the minimum payment, you’ll pay off your charges faster and pay less in interest.

Advantages and disadvantages of credit cards

Credit cards get a bad reputation, mostly because of how expensive credit card debt can be. But there are some pros to balance out the cons. 

Here are some of the benefits of using credit cards.

• Using credit is a convenient way to pay. 

• Some credit cards give you time to pay off large purchases with no interest charges. 

• Some cards allow you to earn cash back, travel miles, or points that you can then redeem for statement credit, cash, gift cards, or travel. 

• Using a credit card could help you build good credit if you make your payments on time and keep your balance low. 

Here are some downsides of using credit cards:

• If you're not careful with your budget, it's easy to overspend on credit cards, especially if you use one-click online shopping sites.

• Paying just the minimum due each month means you take longer to get rid of credit card debt, and you’re almost certain to spend more on interest. 

• Even if you pay on time, carrying a high balance could hurt your credit profile, making it harder to qualify for other credit when you need it.

• Credit cards tend to be an expensive way to borrow. On average, credit card interest rates are higher than personal loan rates or home equity loan rates.

Common causes of credit card debt

There are many reasons someone might end up in credit card debt. It can happen if you overspend, but sometimes, it's just life being life. 

For example, your car breaks down and you don't have an emergency fund, so you charge the repairs to your credit card. Or your beloved pet has an emergency need for care and you pay the vet using a credit card.

Regardless of how credit card debt happens, there's a solution. There are good ways to get rid of that debt. 

How to get help with credit card debt

If you end up with credit card debt and it feels like too much to manage on your own, think about talking to a debt expert. They can look at your expenses, income, and debt to help you work out a plan for addressing it. Depending on the details of your situation, debt solutions might include:

• Debt consolidation

• Debt resolution

• Debt management plan

In some cases, bankruptcy may be the best way to deal with debt. 

If you become so well-versed in using credit that you never need debt help, that’s great. But if you do need guidance, it's comforting to know you have so many options. 

And if you're at a financial crossroads right now, don't hesitate to reach out to a debt expert.

Top credit card debt questions

Debt can be confusing. If you've got questions, we've got answers. 

Dealing with credit card debt

What's the best way to manage my credit card debt? 

The best way to manage credit card debt depends on your situation. For some people, a DIY payoff strategy is the best way to get back on track. Others may need a bigger solution. Talking to a debt expert can help you figure out the right solution. 

What strategies can help me reduce spending and save money? 

Making and sticking to a budget is a proven way to cut down on spending. The less that goes out each month, the more of your income you could save. Using a budgeting app like Achieve MoLO can make it easier to stay on top of your spending and savings goals. 

How do you consolidate credit card debt? 

There are a few ways to consolidate credit card debt. You could consider a personal loan for credit card debt or home equity loan to get rid of credit card debt. 

Managing credit card debt

What should I do if I miss a credit card payment?

If you miss a credit card payment, it's important to make it as soon as possible. If you can’t pay, call the credit card company. They may offer a credit card hardship program to help you get caught up. 

What apps are available to help me manage my credit card debt?

There are several apps to track credit card debt and monthly budgeting. The Achieve GOOD app, for example, helps you create a personal debt paydown plan and track the progress you’re making against your debt. You can connect your financial accounts and see all your debts in one place—and it's free. 

How can I avoid falling into credit card debt?

Avoiding credit card debt is all about spending carefully—and sometimes postponing a purchase until you have the cash to cover it. You don't have to go cold turkey on credit cards. You need to commit to only charging what you can afford to pay in full each month. That can help you avoid debt and build a good credit profile at the same time. 

How much credit card debt do you need for a good credit score? 

You don’t need to carry around credit card debt to have a good credit score. In fact, you’ll have a much easier time building a strong credit profile if you carry little to no credit card debt. Credit scoring formulas consider your credit utilization ratio, which is your credit card balances compared to your credit limits. Higher utilization can cause your score to go down.

If you want a high credit score, you do need to have a variety of credit accounts on your credit report, and you need to use them. But you don’t need to maintain a minimum amount of debt. People with top credit scores tend to have single-digit utilization. So if your credit limit is $5,000, your balance should be no more than $50 to $450.  

You’ll naturally have a credit utilization ratio if you’re using your card and paying it off every month because balances are usually reported before the payment due date. Repeatedly using and paying off your account is a great way to build good credit and avoid paying interest.

Preventing credit card debt

What's the best way to use credit cards?

The best way to use credit cards is to follow these three simple but powerful rules: 

• Pay your credit cards on time each month (or even early)

• Pay in full each month, or if you can’t, pay off your balance as soon as you can

• Only apply for new cards when you really need them

What are some credit card debt warning signs? 

You might be in over your head with credit card debt if you:

• Owe balances on multiple cards, and only pay the minimums each month

• Apply for new cards because your existing ones are maxed out

• Shuffle debt from one card to another using balance transfers

• Have fallen behind on payments, or are in danger of missing a payment

If you notice any of these red flags, you might want to talk to an expert debt consultant about ways to manage debt. 

Credit card interest rates and fees

How are interest rates on credit cards determined?

Credit card companies typically set rates based on a benchmark rate like the prime rate (the rate banks charge their most creditworthy customers). Your credit card company takes the benchmark rate and adds percentage points to it to set the rate for your account. 

For example, the terms and conditions on your credit card account might say that your interest rate is “prime plus 11.99%.” If the prime rate is 8.5%, your rate would be 20.49%. 

Credit card rates are variable, which means they can change. If the prime rate goes up or down, your credit card issuer may adjust your interest rate accordingly.

What are the consequences of late payments on debt and credit score?

Late payments to credit cards or any other debt can hurt your credit. That's because FICO credit scores, which are the most commonly used, are largely based on your payment history. Automating payments to your cards is a simple way to avoid paying late and dinging your credit. 

What are some tips for choosing the right credit card?

Here are a few questions to ask that can guide your search:

• What's your goal for getting a credit card?

• How important is earning rewards?

• Are you comfortable paying an annual fee?

• What cards might you qualify for based on your credit scores? 

Once you find an interesting card or two, look at the interest rate, APR, fees, rewards, and other features. 

Credit Card Debt and Consumer Rights

What are your rights under the Consumer Credit Protection Act when dealing with credit card debt?

The Consumer Credit Protection Act (CCPA) of 1968 is a federal law outlining protections for consumers when dealing with banks, credit card companies, and other lenders. For one thing, lenders are required to explain financial terms to you. The CCPA also protects you from:

• Unfair credit reporting practices

• Unlawful garnishments for credit card debt

• Unfair or deceptive practices by debt collectors

For example, if a debt collector contacts you about a delinquent account, you have the right to request written validation of the debt. 

What are your rights under the Fair Credit Billing Act (FCBA) when dealing with credit card debt?

The Fair Credit Billing Act is designed to protect you against unfair billing practices. It gives you the right to dispute unauthorized credit card charges, or charges for goods and services you never received. 

What do I do if I believe a creditor is violating my rights?

If you believe a creditor is violating your rights under the Consumer Credit Protection Act, what you can do depends on which part of the Act applies. For example, if you believe that a debt collector is violating your rights by making harassing phone calls, you have the right to sue them for damages. If you win, you could get $1,000 in damages plus compensation for harm they caused.

How can I dispute a credit card charge?

If you have a billing error or another charge you believe is covered by the Fair Credit Billing Act, you have the right to dispute it by writing to your card issuer. You must send your dispute within 60 days of the error first being reported on your card statement. Once the credit card company receives your dispute letter, they're required to investigate.

What is a credit card lawyer?

When should I consider seeking help from a credit card lawyer?

You may want to talk to a credit card lawyer if you’re being sued or your creditors are threatening to sue you for unpaid credit card debt. You might also talk to a bankruptcy attorney if you're thinking of filing bankruptcy to deal with credit card debt. 

What can a credit card lawyer do for me?

If you get a summons notifying you that you're being sued or your creditors are threatening to sue, a credit card lawyer could help you draft a response and submit it to the court. They could present evidence on your behalf if the case goes before a judge, and walk you through the steps of filing bankruptcy should you go that route. 

How do I find a reputable credit card lawyer?

You could ask friends and family if they know someone reputable. If you'd rather keep your situation private, look online for credit card lawyers near you. Look for an attorney who offers a free consultation and has an extensive background in credit card debt. 

The information provided herein is intended for general informational purposes only and should not be construed as legal advice. For personalized legal advice, consult with a qualified attorney licensed to practice law in your jurisdiction

Is credit card debt forgiveness possible?

What is credit card debt forgiveness and how does it work?

Credit card debt forgiveness is when your creditor decides to permanently cancel some of your debt. They may be willing to do this if it’s clear that you have a financial hardship that would make it difficult or impossible for you afford to fully repay the debt. 

Debt resolution is a way to get rid of debt without paying in full. You negotiate with your creditors to come to an agreement on how much you'll pay. Once that negotiated amount is paid, the full debt is considered paid. Some people choose to let a professional debt resolution company do the negotiating on their behalf.

Can you really negotiate with creditors to lower your debt?

Yes. Negotiating credit card debt is possible. You can do it yourself, or hire a professional debt resolution company. The latter might be preferable if you don't want to deal with your creditors. Also, a reputable debt resolution company should already have established relationships with most creditors, and may be able to get you a better deal than you could get for yourself.

How does forgiven credit card debt affect your taxes?

Generally, the IRS considers canceled or forgiven debt taxable income. So, if your credit card company forgives $3,000 of a $10,000 balance, you have to report that as income on your tax return. However, there's an exception if you're insolvent (you owe more than you own). 

The information provided herein is intended for general informational purposes only and should not be construed as tax advice. For personalized tax advice, consult with a qualified tax professional licensed in your state.