Credit Card Debt

Credit card debt refers to the outstanding balance you owe on your credit cards. This type of debt is often revolving, meaning you can borrow up to a certain limit, repay it, and borrow again. For instance, if you have a credit card with a $5,000 limit and you spend $3,000, you have $3,000 in credit card debt. If the interest rate on this debt is 18% APR, and you only make the minimum payment, it could take you over 5 years to pay off that debt, costing you over $1,500 in interest alone.

Many people mistakenly believe that carrying a balance is necessary to build credit. In reality, high credit card debt can negatively impact your credit score. Credit utilization, which is the ratio of your current debt to your total credit limit, should ideally be kept below 30%. For example, if your total credit limit across all cards is $10,000, keeping your balance under $3,000 is crucial for a healthy credit score.

Another common misconception is that making only the minimum payment is sufficient. While it keeps your account in good standing, it prolongs the debt repayment process and increases the total interest paid. For optimal financial health, aim to pay off your balance in full each month or at least make more than the minimum payment to reduce your debt faster.

In summary, managing credit card debt effectively is essential for maintaining a good credit score and financial stability. Create a budget to track your spending, try to pay off balances in full, and consider using a debt payoff calculator to devise a plan for reducing your debt over time.