Credit cards can be a double-edged sword. On the upside, credit cards are a convenient way to pay for goods and services on the spot, especially if you’re low on cash. However, it’s all too easy to reach for them to pay for that new pair of shoes you spot in the store window, an expensive dinner out, or the latest shiny gadget.
If you leave this behavior unchecked, you’ll find yourself fast approaching your credit card limit or maxing it out entirely. Then come the painful weeks and months of desperately trying to dig yourself out of the debt trap you’ve fallen in.
Meanwhile, the interest quietly accumulates.
Learning how to sidestep the debt trap of credit cards means fundamentally changing the way you use them.
In this article, we’ll explore the credit card trap in more detail, uncover the five most common debt trap cycles, and offer some actionable steps to take to rid yourself of the burden of debt – permanently.
People get caught in what’s known as the credit card trap for various reasons. Giving in to the desire for instant gratification, they repeatedly reach into their wallets for their cards to pay for clothes and accessories, holidays, or other trappings of a luxurious lifestyle.
When their income isn’t enough to cover the cost of these spending splurges, they end up using their credit cards to pay for necessities such as food, rent, and utility bills.
When their monthly credit card bill arrives in the mail, they decide to make only the minimum payment, telling themselves they’ll pay off the debt in full when their finances improve. This rarely happens unless the individual gets serious about ending the debt cycle once and for all.
Before we discuss how to get yourself out of credit card debt, let’s take a closer look at the five most common credit debt cycle traps.
Many credit cards come with an initial 0% introductory APR on purchases and/or balance transfers; this is usually a limited-time-only perk.
Once this “honeymoon period” is over (usually between 6 and 12 months), the interest rate reverts to the standard APR, which can range from 9% to a staggering 28%.
Every month, credit card issuers require a minimum repayment on the outstanding balance. This amount can vary from 1% to 3% of your total outstanding balance.
Remember, while paying this amount will avoid late payment fees, it does nothing to reduce the debt itself.
When your monthly credit card bill arrives, if you fail to pay at least the minimum amount owing, you’ll be hit with a late payment fee.
If you let this happen repeatedly, these charges can quickly add up.
Consistently making late payments can damage your overall credit score, making it difficult for you to apply for loans successfully in the future.
The interest rate your provider charges on your credit card greatly influences the fees you’re charged for carrying a balance.
If your credit card has a fixed interest rate, it never changes. Essentially, you lock yourself into that particular rate when you take out the credit card.
In contrast, a variable interest rate changes over time. The rate is linked to the prevailing “index rate,” which rises and falls according to economic trends and conditions. When the Federal Reserve increases or decreases interest rates, credit card rate changes will generally follow.
Annual credit card fees are debits that your credit card provider automatically charges on your account every year to keep the card open. The amount of this fee can vary, with some being as high as $400.
It’s a good idea to check what your card provider is charging you, especially given that many issuers offer cards with zero annual fees attached.
In addition to annual fees, some banks and credit lenders impose inactivity fees on accounts that go dormant or remain unused for a certain period.
The first fundamental step to freeing yourself from the scourge of debt is to sit down and create a workable budget. Begin by listing your everyday expenses such as rent, utilities, school fees, transportation, and food.
Next, consider your variable expenses like medical bills, vacations, and car maintenance costs.
While saving for retirement is a worthy goal, it’s sensible to focus first on getting out of debt. Depending on your circumstances, you may need to accept that making a meaningful dent in your debt every month requires making some sacrifices. Seek out ways to start paying less for groceries, find a cheaper cell phone plan, or consider walking or riding your bike to work.
Credit cards aren’t necessarily a bad thing. They do have their place – provided you’re disciplined about paying them off in full every month.
Unfortunately, credit cards lure too many of us into a debt spiral. Try setting a goal to stop using them wherever possible.
Remember that using credit cards is a “false economy.” When you’re not paying off your credit card debt every month, the high-interest charges that you incur mean that you’re paying a whole lot more for what you’ve bought than you would’ve if you paid with cash.
Ideally, you should cancel or cut up all your cards, one by one, after you’ve paid them off.
That being said, you may consider keeping one (with a low-interest rate and low or no fees attached) to use in the event of emergencies.
Another upside of keeping at least one line of open credit is that it improves your overall credit score – provided you manage it responsibly, of course.
The most effective way to avoid the temptation to buy something you can’t afford is to leave credit cards at home when you go out.
If you’ve succeeded in reducing the number of credit cards you hold, only take your card with you when there’s a chance you might need it, for example, to a doctor’s appointment or when traveling.
At all other times, keep it locked away in a safe place at home.
If you’re an avid online shopper, consider removing your auto-stored credit card information from the online stores you frequent. Again, this will make it less likely that you’ll be lured into making unwise or impulsive purchases that you later regret.
You may also consider asking your lender to reduce your credit limit.
The minimum payment on your credit card is the smallest amount that you’re expected to pay every month without incurring any late payment fees. Each credit card company will have a method of calculating the minimum payment due.
Paying only the minimum will keep you in good standing with your credit card company. However, it also sets you up for years or even decades of being at the mercy of your credit card debt and accrued interest.
That’s why you need to strive to get to the point where you can pay off your credit card bill in full every month.
It’s not uncommon for people to end up drowning in debt due to emergencies or other unforeseen life events such as job loss, medical bills, or broken appliances.
While this kind of debt is unwelcome, it’s possible to avoid if you’ve been disciplined enough to build up a “rainy day” fund.
Ideally, your emergency fund should be enough to cover six months of your regular living expenses. Start with small goals – say just a few hundred dollars. Slowly increase it to $500, and then $1,000.
With access to these funds, you’ll avoid the need to turn to your credit card in case of emergencies – something that will ultimately send you spiraling back down into the debt trap once again.
If you’re committed to ridding yourself of the burden of credit card debt but are looking for a fast, easy, and secure way to manage your money, why not consider a general purpose reloadable prepaid card?
Here are some of the benefits of using a prepaid card, like the one offered by Payactiv:
The Payactiv app comes with financial management services that do the work of smart budgeting for you so you can stay on track with spending and saving goals.
Get fast access to your money when you direct deposit to your Payactiv account, use it everywhere Visa® debit cards are accepted, pay bills directly from the app, and locate surcharge-free withdrawals at 37,000 in-network MoneyPass® ATMs. With direct deposit:
You can send and receive money between you and other Payactiv Visa Card* cardholders.
* The Payactiv Visa Prepaid Card is issued by Central Bank of Kansas City, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are associated with the approval, maintenance, and use of the Card. You should consult your Cardholder Agreement and the Fee Schedule at payactiv.com/card411. If you have questions regarding the Card or such fees, terms, and conditions, you can contact us toll-free at 1 (877) 747-5862, 24 hours a day, seven days a week.
1 In order for you to be paid early, your payroll or benefits payment provider must submit the deposit early. It is important to note that your payroll or benefits payment provider may not submit the deposit or payment early each payment period. Be sure to ask your payroll or benefits payment provider when they submit your deposit information to the bank for processing. Early deposit of funds will begin upon the 2nd qualifying deposit. A qualifying deposit is defined as a direct deposit greater than $5.00 received from the same payer.
2 Visa Zero Liability policy covers U.S.-issued cards only and does apply to ATM transactions not processed by Visa, or certain commercial card transactions. Cardholder must notify issuer promptly of any unauthorized use. Consult issuer for additional details or visit www.visa.com/security.
If there’s anything the events of the last two years and the ongoing impact...
* The Payactiv Visa Prepaid Card is issued by Central Bank of Kansas City, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are associated with the approval, maintenance, and use of the Card. You should consult your Cardholder Agreement and the Fee Schedule at payactiv.com/card411. If you have questions regarding the Card or such fees, terms, and conditions, you can contact us toll-free at 877-747-5862, 24 hours a day, 7 days a week.
** Central Bank of Kansas City is the issuer of the Payactiv Visa Prepaid Card only and does not administer, endorse, nor is liable for the Payctiv App.
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