MoneyLife

Why Does a Credit Card Make It Easy To Go Into Debt?

By Anna Yen

Credit card acceptance is widespread, and using cards couldn’t be easier. Nearly half of American adults, or 120 million people, have credit card debt. 

While credit cards let you pay with plastic, they have one significant drawback. Cardholders can end up borrowing more money than necessary and cause repayment stress. Read on to find out why using credit cards often leads to greater debt.

Questioning Credit Cards

Instead of using credit cards, Americans can also use cash and check for payments. Whether credit cards belong in the payment toolkit depends on a few factors. 

Do I need a credit card?

Using credit comes in handy for daily expenses or when making a larger purchase, especially if you don’t want to carry around a lot of cash. Credit cards are also useful for unexpected costs, like if you need a medical bill in a pinch. 

One of the main benefits of credit card usage is to build credit history, though there are many ways to improve a credit score

Lenders, including credit card companies, report your payment history to credit bureaus. These bureaus will allocate a credit score based on your credit history, credit mix, and debt-to-income, among other factors. 

When you make credit card payments on time, it gets reported to the credit bureau. Lenders can then see that you can repay debts responsibly. If you need to borrow money later on for a house or a car, a healthy credit score paves the way for accessing loans, potentially at lower interest rates.

Getting a credit card can increase your spending power, but it also makes it easier to lose track of spending. You might not even realize how much you’re spending until seeing the monthly statement. 

Which credit card to pay off first?

Once you start getting approved for credit cards, applying for more can be tempting. When you have several credit cards with balances, which card do you settle first? 

Ideally, you have the funds to pay off your balance each month, and you can first pay off the card with the nearest due date. If you’re carrying over balances every month, find out the interest rate (APR) you pay on each card. To save the most money, pay off the credit card debt with the highest interest rate. Once you finish paying off the card with the highest interest, move on to the next most expensive debt until you’re debt free. Paying off debts is a crucial step towards kickstarting your financial independence.

When do I pay my credit card bill?

Credit card issuers report your payments every 30 days, but this may not match exactly with your monthly credit card payments. If this month’s payment hasn’t appeared on your credit report, it should show up in the next month. Make sure you make the minimum payment (or more) by your payment due date.

Can a debit card be used as a credit card?

You can use a debit card anywhere that credit cards are accepted. However, while you can borrow money using a credit card, you cannot with a debit card. Making purchases with a debit card requires having the funds already in your checking account.

Can you negotiate down your credit card debt?

Negotiating a credit card settlement is possible. If your debts have accumulated and you haven’t been able to pay, they may have already gone into collections. Settling the debts would mean trying to get a collections agency to accept a lower amount for paying off the debt. You may be able to settle the debt for less than you owe. However, doing so can negatively impact your credit score. 

If your debt is growing but you can still make payments, you can start trying to negotiate lower interests or an extension of the repayment period.

What happens if I don’t use my credit card?

If you don’t use a credit card for longer periods, the issuer might terminate your account. After termination, your credit score might drop, even if you’re repaying other credit cards.

Besides having a credit score drop due to account termination, inactive accounts are prone to fraudulent charges that could negatively impact your credit rating. Keep your account safe by locking your credit. This keeps away fraudsters and cybercriminals.

Can you pay off a credit card with a credit card?

Most credit cards do not allow you to directly make a payment on a credit card bill with another credit card. Cardholders make payments using savings or checking account transfers or by check.

However, you can use balance transfers to pay off debt from one credit card with another. You are essentially transferring the credit card balance from one card to another that charges lower interest rates.

You may also opt for debt consolidation to pay off your debt. This is where you combine all your credit card debts into one with more favorable terms like lower interest rates.  

Advantages of a credit card 

  •  Increases your purchasing power
  •  Builds credit history
  •  Offers rewards such as miles and cashback
  •  Protects from fraudulent spending

Disadvantages of a credit card 

  • Increases your risk of overspending
  • Incurs annual charges, late payment, and financing fees
  • High-interest rates are possible
  • Makes it easy to add to the debt trap 

How to avoid credit card debt

You have access to a few easy solutions to avoid credit card debt.

  1. Pay off your balance in full each month
  2. Pay off the highest interest rate balances first.
  3. Try Instacash for essentials or emergencies. Access up to $250 in minutes at 0% interest without a credit check.
  4. Join Credit Builder Plus Membership, a full-featured membership offering a loan of up to $1000. You’ll get access to rewards and 0% APR cash advances, as well as credit monitoring tools. Applying will not affect your credit score.

Avoiding the credit card debt trap

Falling into the trap of increasing credit card debt can be crippling. Start by paying off the most expensive debt credit card debt and making payments on time. Your credit score will thank you for it. 

If you’re strapped for cash, MoneyLion’s Credit Builder Plus Membership provides access to funds while helping you build credit. 

The more income you can generate, the faster you’ll pay off debt. Grow your money for just $1/ month, with no hidden fees, with MoneyLion’s fully managed investment account. You can enjoy investing made easy, with no minimum balance requirement. Signup today at MoneyLion.

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