What causes credit card debt?

What you can do to fix your credit card debt problems.

If you’re tackling credit debt problems, it can be tricky to figure out where to start. You might think paying off your debts is the end goal but if you don’t understand why you got into this situation in the first place, there’s a chance that you could end up back in debt again very soon.

There are many reasons you could find yourself back in debt and we’ll help explain them here. If you're looking to get out of debt and need a little help, then there's no shortage of financial experts out there who can put together a plan that'll lead your finances back on track.

Comparing debts

When you compare different types of debts, you will see that credit card debt can be one of the most difficult ones to get out of. Credit card debt is created with desire, the need of something that one cannot afford at the time.

When you add these debts together and add interest rates to them, then you'll find that your total debt will be much higher than you imagined it could be.

Types of credit card debt

There are two main types of credit card debt that, if not used carefully, can cause you to end up with debt problems.

• Standard credit cards - This is the most common form of credit card. A bank or other financial institution will issue you with a physical credit card that has a spending limit depending on your salary and credit score. This credit card can be used for purchases at any store. It’s important to remember to pay back your credit card debt as soon as possible, preferably at the end of each month. If you don’t pay your credit card debt in full each month you’ll incur additional interest on what you’ve borrowed. This interest rate is extremely high at around 18%, so it’s best to pay it off sooner rather than later.
• Store cards - Store cards work similar to a credit card, a store card, however, will only allow you to purchase items from a specific store or a chain of stores. These store cards also have high interest rates and will often impose penalty charges if a payment is not made on time.

5 Reasons for credit card debt

• Overspending - Overspending is a real issue. Consumers feel comfortable spending, even when they don’t have the funds to do so. Many turn to their credit cards to pay for things like vacations, shopping and daily living expenses, feeling confident that they’ll be able to pay that minimum payment at the end of each month.
• Increasing food prices - The rising food prices are putting strain on consumers, especially those who are already struggling to make ends meet. People don’t even have enough money for their day-to-day lifestyle, which is a reason they end up going into debt. Time and again, people find themselves in a position where they don’t have a choice but to borrow money.
• Lack of an emergency fund - Emergencies are also an inevitable part of life. We never know when that sort of thing will happen. We have seen countless cases where people get involved in car wrecks or serious illnesses, causing them to pay for the damages or health care with their credit cards, as they may not have immediate access to the funds needed. As such, it's important to make sure you always have plenty of money saved up in your emergency savings account so that you can avoid getting yourself into debt by using your credit card.
• Living beyond your means - One of the biggest reasons and causes of credit card debt is that people want to live the same life as their peers. People tend to live beyond their means. Try not to buy everything that your neighbours or family members have, even if you can afford it! Jealousy will divert money from your focus, and turn into bad spending habits that don't benefit anyone.
• Only making the minimum payment - When you add interest in the mix, your minimum payment only lowers your outstanding credit balance by a small amount each month. If you only make the minimum payment each month, but continue to make purchases using your credit card, you are only adding to your debt problem.

Credit card debt and your credit score

Credit card debt is one of the biggest factors affecting your credit score. Carrying a lot of credit card debt can hurt your credit score and your ability to get approved for store cards, loans or even vehicle finance. That's why it's not a good idea to max out your credit card.

This is the best way to maintain and protect your credit score:

• Always ensure that you pay your credit card bill on time.
• Keep your credit utilisation ratio below 30%.
• Minimise the number of credit applications you make.

How to avoid credit card debt

Create a budget

Many people cringe when they hear the ‘B’ word. Unfortunately, most people actually underestimate how much they spend each month. Having a budget in place can help open your eyes on easy ways that you can save money.

A budget can help you see things more clearly. You’ll be able to identify exactly how much you’re earning and how much you’re spending. This will help you identify areas where you can save money each month. Whether it’s that expensive gym membership you never use or that subscription service you forgot about.

Build an emergency fund

Having an emergency fund can help safeguard your wallet against any unexpected expenses. An emergency fund can not only help you save a ton of money, but it can also help you avoid going into debt. When an unexpected debt arises, a person who does not have an emergency fund will be forced to pull out their credit card. Vet bills, vehicle repairs and medical emergencies are among the things many of us do not budget for. With an emergency fund, you wont need to resort to credit cards or high-interest loans.

At a minimum, it is recommended to have at least three months worth of living expenses saved in your emergency fund.

Pay what you can

Having a credit card means having the responsibility to pay your debt at the end of each month. If you fail to make a payment, you’ll only incur additional interest which will just prolong your debt.

If you’re having trouble making your minimum payments, don’t hesitate to contact your creditors. Depending on your circumstances, they may even be able negotiate your credit card rate and lower your interest.

If you can pay some of the minimum payment on your credit card then you should do so, any amount helps even if it’s not the full minimum payment.

If, however, you can afford to pay more than the minimum payment on your credit card, then you should always do so. The more you pay into your credit card each month, the less interest you will be charged.

When your income isn’t enough to cover your expenses, it can be very tempting to use your credit card to fill the gap. While we all want to save money where we can, we don’t want to end up with a lot of credit card debt. Using your credit card to cover your expenses can end up costing you even more money in fees and interest if you don’t pay it off quickly. We hope that today’s post gave you some great tips that you can use to avoid or decrease your credit card debt. If you have any questions about how to handle credit card debt, feel free to contact Credit Health.