Credit card debt is not your friend. According to the most recent data from the Survey of Consumer Finances by the Federal Reserve, the average approximate credit card debt of US households is $5,700. In addition, As of August 26th, 2020, the average credit card interest rate stands at a whopping 16.03%.
Let’s Do Some Basic Math
So, let’s assume you have $5,700 in credit card debt at a 16.03% interest rate. Assuming you pay $57 a month, it will take you 30 years to pay off your debt. By the time you’ve paid this CC debt off, you will have paid a truly mind boggling $59,340. Furthermore, even if you are paying $228 a month towards this credit card debt, it will still cost you $8,454.40 and take nearly 11 years to pay it off. CC debt is truly financially crippling. Interested in learning more? BankRate has a great calculator to determine how long it will take to pay off credit cards.
Pay Credit Card Debt Off ASAP
There is a reason why the wealthy don’t accumulate credit card debt. Firstly, it’s unproductive debt. Secondly, interest rates are so low that there are significantly cheaper ways to borrow debt. For example, Credible.com provides a service to refinance credit card debt into a personal loan with rates starting at 5.99%. While 5.99% is still high, it’s significantly better than 16%+ and forces you on a quicker payback schedule. Whatever you decide, it’s important to come up with a plan that allows you to pay off credit card debt quickly and get out of the financial trap.
Wait! Doesn’t Paying Credit Card Debt Off Lower My Score?
In the most widely used FICO scoring model, credit card utilization is responsible for about 1/3 of your overall score. Credit card utilization is measured by dividing your total credit card balances by your total credit card limits. While experts suggest keeping credit utilization at 30% or less for a good score, we recommend as close to 0% as possible. Put simply, use your credit card(s) for purchases but be sure to pay them off every month in full, ideally. Your credit score will thank you over time, even if it drops slightly by paying off the balance in the short term.
Rethinking Credit Cards
Credit cards are not all bad. In fact, you can use them to generate rewards like free travel or just straight up cash. Assuming you pay the balance in full monthly, you will be paid for using your credit card every month.
Get A Quick Credit Score Boost*
For the first time ever and only with Experian, you can increase your credit scores fast by using your own positive payment history. Experian Boost is completely free, no credit card required! It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
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Bottom Line: Pay It Off, Borrow Cheaper Later
Credit card debt is crippling and paying it off helps boost your score significantly over time. While your credit score may temporarily drop slightly once you pay it off, your overall credit score will improve long term. By improving your credit score long term, you’ll be able to borrow more cheaply in the future if you’re buying a home, car, or other large purchases. Best of all, you can rest easier knowing you aren’t stuck in the credit card trap.