As of the fourth quarter of 2023, national credit card debt has reached a whopping $1.13 trillion, according to the Federal Reserve Bank of New York. That means a lot of people are dealing with the reality of having high-interest debt, and potentially struggling to pay it off.
If you’re one of those people, or you’re just looking to avoid taking on credit card debt, here are four common mistakes to watch out for, and what to do instead.
Mistake 1: Pretending your debt doesn’t exist
If you have credit card debt, it’s easy to ignore it for the sake of peace of mind — especially if you’re just paying the monthly minimum payments. But if you still use the cards for everyday purchases, that’s a quick route to even more debt and a harder journey to being debt free. So, although it can be difficult, getting yourself to face the problem is a solid first step to getting out of credit card debt.
Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards
The best thing to do if you’re in that situation is to go into each credit card account and write down your balances, interest rates, and minimum monthly payments. That way, you’ll be on the path to creating a plan to get out of debt.
Mistake 2: Avoiding autopay
If you have a stable enough income, autopay can be your best friend in avoiding and paying off credit card debt. But on the flip side, avoiding it can lead to missed payments which will negatively impact your credit. And that will lead to consequences like higher interest rates on loans in the future, which will cost you. (That’s beside the potential late payment fees you could face.)
For example, if you have a 740 credit score, you may be able to qualify for a $10,000 personal loan with a 7% interest rate (depending on the available rates when you apply). That means you’d pay $3,500 in interest over the course of a five-year repayment term. But if your score dropped to the low 700s, you may only qualify for a 14% APR. That would cost $7,000 in interest for the same terms. That’s double what you would have paid.
Remember: Your payment history accounts for 35% of your FICO® Score, so this is a vital factor to keep an eye on as you manage your credit cards.
Mistake 3: Closing old credit cards
Another common mistake for those who pay off credit card debt can be closing cards that have been paid off. On one hand, it can help avoid taking on more debt since you’d no longer have access to that additional credit. But you should note that there can actually be negative consequences here.
First, if the card is one of your oldest credit accounts, closing it could shorten your credit history, which accounts for 15% of your FICO® Score. Again, that can lower your score, which often translates to more expensive loans in the future. Plus, if you still have credit card debt, eliminating a card could increase your credit utilization, which accounts for 30% of your FICO® Score.
So if possible, it’s usually best to keep accounts open and simply take the cards out of your wallet so you can’t use them. (Just remember that you should use them for small purchases every few months to avoid having the issuer close the account due to inactivity.)
Mistake 4: Putting off saving money
Credit card debt is often a result of unexpected expenses that can’t be covered by savings. So one of the best guards against it is a healthy emergency fund. For most people, that should be enough to cover three to six months’ worth of necessary expenses. Even if you’re in the middle of paying off debt, it’s a good idea to prioritize saving money too. That way, if something comes up down the line (potentially when interest rates go up), you won’t have to worry about sliding into even more debt.
Credit cards can be useful tools, but it’s easy to make mistakes that can lead to high-interest debt. As long as you’re aware of the common errors that can come with them, and take steps to avoid those, you’ll be able to take advantage of the perks these tools offer without putting your personal finances at risk.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.