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3 signs credit cards are ruining your finances (and how to fix it)
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Amid persistent inflation, Americans are struggling under the weight of the current economic climate. Prices are rising across the board, from the grocery store to car insurance. Compounding the problem are high interest rates that are causing the cost of borrowing to skyrocket. For example, since 2021, the average credit card interest rate has soared from 16.45% to 22.63%, according to the most recent Federal Reserve data.
That’s bad news for many Americans who must rely on credit cards to help make ends meet. According to a recent Clever Real Estate survey, 61% of Americans are in credit card debt, and roughly half depend on their credit cards to pay living expenses. When bills and debt consume so much of your home budget, there’s little room left to save for a financial emergency or retirement.
If your credit card debt rises beyond your means to repay it, the impact it could have on your finances could be catastrophic. If your credit card debt is at a level you’re uncomfortable with, it’s time to resolve the issue before it ruins your finances.
Explore your top debt relief options now and start tackling your high-rate debt.
3 signs credit cards are ruining your finances (and how to fix it)
Here are three signs you might have too much credit card debt and tips to fix it.
Sign #1: You only make the minimum payments
Your credit card company gives you a grace period, usually between 21 to 25 days, to pay your balance in full. You won’t incur any interest charges if you pay off your entire balance within this period. However, if you only make your card’s minimum payment, usually around 1% to 3% of your balance, you must pay interest on the remaining balance.
“You’re in trouble if you can only make the minimum payments and can’t chip away at the balances,” Joseph Camberato, CEO at NationalBusinessCapital.com, says.
Camberato recommends controlling credit card debt before it gets out of hand.
“If you ignore credit card debt, that can really mess up your (credit) score. A good rule of thumb is to keep your credit card balance below 33% of your total limit.,” Camberato says.
High credit score achievers typically utilize less than 10% of their available credit.
Find out more about your credit card debt relief options here.
Sign #2: Your credit card debt is increasing
“It’s a bad sign if your credit card balances continue to increase despite making payments, which means your debt is growing uncontrollably,” says Leslie Tayne, a financial attorney at Tayne Law Group and author of Life & Debt.
If you find yourself in this situation, it may mean you are relying too heavily on credit cards to cover expenses, which can lead to a cycle of debt that’s hard to break. To regain control, create a strict budget that minimizes unnecessary spending. Also, consider increasing your income by volunteering for extra hours at work, requesting a wage increase if warranted or taking on a side hustle.
Sign #3: You’re falling behind on payments
“Another red flag is if you start missing payments,” says Camberato. “These are clear signs that your spending is outpacing your income.”
You may be able to get away with minimum payments while your credit balance continues to grow, but it could eventually lead to late or missing payments.
“Late payments and high balances can cause significant damage to your credit score, which makes it more difficult to get approved for credit in the future,” says Tayne. “And if you are approved, you’ll be more likely to pay high interest rates. Bad credit also makes it more difficult to rent an apartment, open utility accounts and even get certain types of jobs.”
4 strategies to tackle credit card debt
The first step to reduce your credit card debt is to cut discretionary spending to free up more money you can apply to your debt balances.
Start with recurring bills like seldom-used gym memberships or streaming services. And, consider shopping different car insurance companies to see if you can find similar coverage with lower premiums.
Next, consider your options, which may include the following:
Debt repayment strategies
The two most popular strategies are the debt avalanche and the debt snowball methods. The avalanche method focuses on paying off the debt with the highest interest rate, while the debt snowball method prioritizes paying off your lowest credit card balance first. You’ll likely save more money with the debt avalanche method, but you may prefer the snowball method if you think the momentum from quick wins will motivate you to keep going.
Debt consolidation loan
A debt consolidation loan allows you to combine all your credit cards into one personal loan you repay in fixed monthly payments for a specific term. The benefit of a debt consolidation loan is that you can get a lower interest rate and simplify your finances by replacing multiple payments with a single one.
Balance transfer credit card
With good credit, you may qualify for a balance transfer credit card with an introductory 0% APR for a specific period, usually up to 21 months. That could give you plenty of time to pay down debt interest-free, but be aware these cards usually come with an upfront balance transfer fee of 3% to 5% of the amount you transfer on average.
Credit card debt settlement
One way to lower your credit card balances is to call your creditor and negotiate for a lower balance. Alternatively, debt settlement companies can negotiate with your creditors on your behalf. Consider the pros and cons of pursuing this path and make sure you go with a reputable company, says Camberato.
“Do some research, read reviews, and make sure the company is legitimate. While some companies can help, others might do more harm than good. Some companies might tell you to stop paying your credit cards and pay their company instead and that leads to late payments and a wrecked credit score,” Camberato says.
The bottom line
There are some big signs to look for if you’re worried that your credit card debt is impacting your finances — but there are also some decent solutions to fix the issue. In addition to options like credit card settlement and debt consolidation, you might consider working with a credit counselor if you’re having trouble managing your finances and credit. These advisors can help you create a budget or debt management plan to help zero out your credit card debt.
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As credit card debt climbs nationwide and credit card interest rates soar, many Americans have found themselves struggling to pay off what they owe. After all, you don’t need a high balance to find yourself in serious financial trouble when your credit card interest rate is 23% (or higher), as the interest charges will compound quickly at that rate. As a result, many cardholders are looking for relief, and credit card debt forgiveness programs are one option worth considering.
These programs are typically offered through debt relief companies and can help borrowers negotiate with creditors to reduce their outstanding balances — sometimes by as much as 50%. However, the path to debt forgiveness is filled with potential pitfalls that could leave you in an even worse financial position than when you started. While the promise of reducing your debt burden is alluring, making the wrong moves during this process can expose you to legal action from creditors or even lead to tax complications.
So before pursuing credit card debt forgiveness, it’s crucial to understand the common mistakes that could derail your debt relief journey and potentially cost you thousands of dollars. Otherwise, this approach could end up costing you a lot more than you bargained for.
See if you qualify for credit card debt forgiveness now.
Want to have your credit card debt forgiven? Avoid these 3 costly mistakes
Here are three critical errors to avoid when seeking credit card debt forgiveness.
Failing to understand the debt settlement process
One of the most significant mistakes people make is diving into debt settlement without fully understanding how it works. Unlike debt consolidation or credit counseling, debt settlement requires you to stop making payments on your debt for an extended period. This is designed to show creditors that you’re in financial distress and compel them to negotiate, but it comes with serious risks. Late payments will be reported to credit bureaus, further lowering your credit score and potentially triggering collection calls or lawsuits.
Many people also underestimate the importance of timing and strategy when approaching creditors. If you attempt to negotiate too soon — before demonstrating financial hardship — or without a clear plan, your creditors may be less likely to agree to a reduced payment. Others fail to research the terms or fees associated with hiring a debt relief company, some of which charge high costs for services that may not guarantee results.
To avoid this mistake: Educate yourself thoroughly about the debt settlement process and consider consulting a financial advisor or credit counselor before making any decisions. If you decide to work with a debt relief company, ensure it is reputable and transparent about its fees, timeline and success rates.
Find out what debt relief options are available to you here.
Overlooking tax implications of forgiven debt
Many borrowers are surprised to learn that forgiven credit card debt isn’t always “free money.” The IRS generally considers forgiven debt as taxable income, meaning that any amount your creditor writes off could result in an unexpected tax bill. For example, if you settle a $10,000 debt for $4,000, the remaining $6,000 may be subject to income tax, depending on your financial situation and local laws.
Failing to account for this can lead to financial headaches during tax season. Some people may even find themselves unable to pay the extra tax liability from their forgiven debt, creating a new debt issue on top of the one they just resolved. While certain exceptions apply — for example, if you’re insolvent at the time of settlement — these rules are not automatic, and you’ll need to file the appropriate IRS forms to claim the exemption in these cases.
To avoid this mistake: Consult a tax professional before finalizing any debt settlement. They can help you understand the potential tax consequences and advise on ways to minimize your liability. You should also keep detailed records of your financial hardship, as this documentation can be critical if you need to prove insolvency.
Neglecting to get the agreement in writing
Verbal agreements with your creditors to settle your debt for less than what you owe may seem reassuring in the moment, but they offer no legal protection if the creditor or collection agency goes back on their word. A common mistake is failing to insist on a written agreement that clearly outlines the terms of the settlement. Without this documentation, you risk continuing collection efforts, lawsuits or even the debt being sold to another collection agency.
This mistake is especially prevalent when dealing with third-party debt collectors, some of whom may use unethical tactics to secure payments. If you don’t have written proof of the settlement agreement, you could end up paying more than you originally negotiated — or worse, finding yourself back at square one.
To avoid this mistake: Always insist on receiving a written agreement before making any payment. The document should specify the agreed-upon settlement amount, the payment deadline and a confirmation that the remaining balance will be considered resolved. Once you receive the agreement, review it carefully to ensure it matches what was discussed, and save copies for your records.
The bottom line
Settling your overwhelming credit card debt for less than what you owe can be an effective way to regain financial stability, but the process requires careful planning and attention to detail. By avoiding these three costly mistakes — failing to understand the process, overlooking tax implications and neglecting to secure written agreements — you can navigate the debt settlement process more successfully. With a clear understanding of the big mistakes to avoid, along with a plan and the right resources, you can reduce your debt burden and move closer to a debt-free future.
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