Despite how harmful credit card debt can be, it is very common. Almost half of all credit card users are in debt, and the average American household with credit card balances owes $6,270 in debt. If they are paying the average interest rate of 24.20%, that means they would be paying $1,517 per year in interest.

If you find yourself carrying credit card debt, you are not alone. Unfortunately, shame and embarrassment can hinder your ability to focus on the debt and pay it off as quickly as possible. Here’s how to get rid of credit card debt for good and relieve yourself of the stress and anxiety that always comes with high-interest debt.

1. Know how much debt you have

You may know exactly how much credit card debt you carry down to the penny, in which case figuring out how much debt you have seems like a silly suggestion. However, many Americans avoid thinking about their debt at all costs, and around 25% don’t know how much credit card debt they have. If you are part of this 25%, the first (very painful) step to getting out of debt is determining exactly how much debt you have and the interest rate on each credit card, if you carry debt on more than one card. Knowing how big the problem is makes it more difficult to ignore and helps you prioritize which credit card to pay off first.

2. Determine how much you spend each month

The next step to paying off your credit card debt is determining how much you spend each month. If you have credit card debt, chances are you may be spending more than you make (unless your debt is due to one-off spending for emergencies). Take a moment to sit down, look at all of your accounts, and categorize all of your expenses from the prior month. If you are spending more than you make, your budget is not sustainable and you will continue to accumulate more credit card debt unless you make a change. You must reduce your spending or increase your income to pay off your debt. 

3. Develop a plan for paying off your debt (and stop using the card)

Once you know how much you are spending every month and have (or can make) room in your budget, next you will develop a plan for paying off your credit card debt. Make your debt a priority and a top-level budget item instead of just using whatever money is leftover at the end of the month on your debt. Dedicate as much money as possible to your credit card debt; it is in your best interest to get rid of it as quickly as possible. Financially, it is better to prioritize debts in order of interest rate and pay off the highest interest rate debts first. Some believe in paying off the smallest debts first, which may give you the motivation you need to keep going. Check out our take on the avalanche vs. snowball method if you are curious which may be right for you.

An important step of getting rid of credit card debt is making sure you don’t accumulate any additional credit card debt while you are working to pay yours off. It may make sense to only use a debit card if you are prone to overspending when using credit cards.

4. Implement your plan (and make changes as necessary)

Now that you know how much debt you have, know what you are spending each month, and have developed a plan for getting out of debt, it should be smooth sailing, right? Maybe! But maybe not. Prepare for setbacks and have a plan for when things don’t go quite as expected. What if you have an emergency vet bill of $2,000 one month? Or worse, what if you or your spouse lost their job? Everything might not go as expected when paying off your credit card debt. Your “get out of debt” plan should evolve if your financial situation changes.

If you experience unexpected expenses one month that hinder your ability to pay off debt, look for ways to make more room in your budget. Maybe it makes sense to spend a month not eating out and shopping at a discount grocer like Aldi. Hopefully your plan will go as expected or better than expected, but a willingness to make changes to your plan and make sacrifices might be necessary to ensure your success.

Nobody wants to have credit card debt, and rarely does anyone plan to take years and years to pay off their cards. Credit card debt usually starts small. It’s easy to make a purchase on your card without the money to pay for it. After all, you can just pay off your credit card when you get paid and you won’t even owe any interest. What’s the harm in that? But maybe you have a minor financial emergency right after you get paid. You have to use your paycheck to take care of the emergency, but that’s alright. You can pay off your credit card next month.

Next month comes around faster than you expected and after last month’s financial emergency, you aren’t sure you have enough money for groceries and gas this month, much less extra money to pay off your credit card. The stress from worrying about money could lead you to make more poor financial decisions. Spending money on your credit card helps you forget that you don’t actually have the money to be spending on your credit card, if only for a moment. Next month your credit card balance and stress both grow and the cycle continues.

It is all too easy to fall into credit card debt. Remember that you are not alone and this is a trap that ensnares millions of Americans. It may not feel like it right now, but it is possible to get rid of your credit card debt completely and never look back.

History of credit card interest rates

Credit card debt is unsecured debt, which means you are not required to “secure” the debt with an asset. Mortgages and car loans are two common types of secured debt, or debt backed by collateral. If you fail to pay your mortgage or car loan, the bank has collateral (your house or car) it can repossess. Interest rates on mortgages and cars are naturally lower than credit card interest rates because the debt is secured.

Comparing credit card interest rates to mortgage and car loan rates isn’t a fair comparison, but we can compare credit card interest rates today to historical rates. Credit card APRs are currently at an all-time high since the Federal Reserve began tracking data back in 1994, but the federal funds effective rate has also risen significantly over the past few years. Instead of comparing credit card rates now to credit card rates a few years ago, I want to compare credit card rates now to a time when overall interest rates were similar.

The Federal Funds effective rate is currently 5.33%. From October of 1994 through December of 2000, the average federal funds rate was 5.51%. All else being equal, I would expect credit card rates to be about the same in that period as they are today – if not a little higher back then since federal rates were higher. But that is not what we’re seeing. From the 4th quarter of 1994, when the Federal Reserve began tracking credit card APRs, to the end of 2000, the average credit card interest rate on accounts being charged interest was 15.39%. Today, the average credit card interest rate on accounts being charged interest is 22.75%. This chart from the Consumer Financial Protection Bureau shows how credit card rates have risen much faster than prime rate.

Why is there such a large discrepancy? Is it more expensive to lend now or is something else going on?

Why credit card interest rates have gone up

To give credit card companies the benefit of the doubt, if more Americans are not paying off their debts, raising credit card interest rates would be a natural way to maintain your profit margin and protect your company from losses. Fortunately all of this data is tracked so we can see if this is why credit card rates are so much higher these days. This chart, also from the Consumer Financial Protection Bureau, shows the APR margin of credit card companies and the charge-off rate. The charge-off rate is the percentage of defaulted balances compared to the total amount of credit outstanding.

This chart is insane to me. 1995 to 2011 are what I would expect the chart to look like, and then we see a huge divergence after 2011. The APR margin for credit card companies keeps rising while the charge-off rate remains low and steady. What does this mean? Credit card companies are making more money than ever off of Americans. But there is a way you can win and beat the credit card companies at their own game.

How to beat the credit card companies

Credit card companies will likely continue increasing their profit margins over time, which means consumers with credit card debt will pay more and more interest to credit card companies. However, you can beat the credit card companies at their own game. We believe it is possible to responsibly use credit cards and not carry a balance from month-to-month. If you are able to do this, you will receive all of the benefits of using credit cards (rewards, better protection, extended warranties, travel benefits, and more) with none of the penalties (high interest rates and fees).

Not all Americans are able to use credit cards responsibly. The data shows that only 35% of cardholders always pay their balance in full every month. If you are part of the majority of Americans that does not use credit cards responsibly, credit cards might not be for you – and that’s okay. It is much better to use debit cards and have a little less protection and fewer rewards than to rack up debt on a credit card and pay an exorbitant amount in interest and fees to credit card companies.

The interest rate on credit cards has changed significantly since the 1990s, but the trap you need to avoid has not changed. Don’t let credit card companies win and make money off of your hard-earned dollars. Put that money to work for you and start investing today. Check out our new Wealth Multiplier tool to see exactly what each dollar you save in credit card interest could turn into by retirement.

Are credit cards all bad or can they be used in a smart way to build wealth? In this highlight, we discuss the benefits of using credits cards as a financial tool.

Are credit cards can be used as a tool as long as you use them wisely. In this highlight, we discuss if credit cards are all bad and how to use them to your advantage.

Credit cards can be a hot topic in the financial world, but we believe they can be used as a a wealth building tool, when used correctly. In this highlight, Brian tells us what some of his favorite credit cards are, the benefits that you can earn from using them, and Clark Howard’s favorite credit cards.

For more information on how to use credit cards the smart way, check out this blog post called, “How to Use Credit Cards Like a Pro.”

New data shows that Americans are struggling when it comes to credit card debt and savings rates. In this Q&A, we discuss the new shocking data and give you tips on how to avoid this huge financial mistake.

New data shows that Americans are struggling when it comes to credit card debt and savings rates. In this Q&A, we discuss the new shocking data and give you tips on how to avoid this huge financial mistake.

Overall, 76% of Americans have at least one credit card. 47% of credit card users have credit card debt, with an average balance per person of $5,315. It’s clear that a large portion of Americans struggle with credit card use and credit card debt, and may be better off avoiding them entirely. For those that have the discipline and self-control to use credit cards and pay their balance in full each month, what are some advantages to using credit cards over cash or debit cards?

Advantages of credit cards

80% of Americans prefer card payments over cash, and only 10% exclusively use cash. Swiping is our favorite way to pay, but not with credit cards: credit cards account for just 33% of card transactions, and debit cards make up the majority of card transactions at 67%.

There are a few reasons to consider using credit cards instead of debit cards. Most credit cards have zero fraud liability. When your debit card is used fraudulently, it is YOUR money missing. When your credit card is used fraudulently, it is THEIR money missing. Debit cards and bank accounts do have safeguards and protections against fraud, and will help you if you become a victim of fraud, but credit cards are usually much better and faster at resolving fraudulent transactions. In addition to enhanced fraud protection, credit cards often have other safeguards that debit cards do not, such as purchase protection (which means if an item drops in price shortly after you buy it, you can get a refund for the difference) and extended warranties.

It is more expensive to use cash and debit cards than credit cards at most businesses. Merchants are charged credit card processing fees for every transaction, and pass this cost along to the consumer. Credit card users can make some or all of this money back through points and rewards, but cash and debit card customers cannot. Some businesses offer discounts for those that pay in cash or with a debit card, but most do not. If you shop at businesses that charge credit card and debit card users the same, you are helping to subsidize credit card rewards. The Federal Reserve has estimated that each credit card-using household in the United States receives $1,133 over the course of a year from cash users.

Using credit cards isn’t all sunshine and rainbows, though. People spend 12% to 18% more when using credit cards instead of cash. Electronic transactions don’t feel the same as spending “real” money, so it’s easier to spend more on credit cards than it is with cash. If you are new to credit cards, you might consider easing yourself in by setting up auto-pay on monthly bills. Start by only using credit cards for expenses you have to pay every month and have no control over to ensure there is no opportunity to overspend. If you spend more on credit cards than with debit cards or cash, much or all of the benefits are completely negated.

Credit card benefits to look for

There are two types of credit cards, secured and unsecured. Secured cards are backed by a cash deposit, so it’s less risky for the issuer and available to those with less than stellar credit. Secured credit cards typically have fewer benefits and rewards than unsecured credit cards, which are not backed by any collateral and are riskier for the card issuer. Many of the benefits listed might only apply to unsecured credit cards, but some apply to secured credit cards as well.

1. Fraud protection

Shop with a credit card anywhere you’d like a little extra protection. By law, your liability is limited to a maximum of $50 for unauthorized transactions, but most card issuers have zero fraud liability policies.

2. Points or rewards

Some credit cards offer cash back rewards that can be redeemed as statement credits or other cash equivalents. Others offer rewards that may only be redeemed for certain things, like miles for traveling or points for gift cards.

3. Extended warranties

Potentially one of the greatest features of a credit card is extended warranties. If you are making a big purchase, like an expensive home appliance or television, use a credit card with an extended warranty feature. This could help replace the purchase later down the road if something goes wrong.

4. Price matching

Some credit cards will price match items, which means if you make a purchase with your credit card and the price later drops, you can get a credit for the difference.

5. Insurance

Credit cards may offer travel or trip insurance that covers you if your flight is delayed or you use your luggage. Using a card with this feature can be great for frequent travelers.

6. Interest rate

The interest rate on your credit card only matters if the unexpected happens, and might not ever matter, if you never carry a balance on your card, but it’s always better to have a credit card with a relatively low interest rate.

Credit card myths

1. Carrying a balance helps your credit score.

One of the longest-standing and most common misconceptions about credit cards is that you need to carry a balance every month to maintain a high credit score. This isn’t true; a 0% utilization rate won’t negatively affect your credit score unless you’ve stopped using your credit cards altogether. Activity on your credit cards is good because it shows you know how to use credit responsibly; no activity could bring down your score slightly because it might mean you don’t know how to use credit cards.

2. Credit cards are bad.

Credit cards aren’t bad, but they can be harmful when used irresponsibly. Credit cards are safer than debit cards because of the stronger fraud protection, they may offer extended warranties, and many cards earn cash back rewards or airline miles. When used irresponsibly, though, credit cards can trap you in a deep hole of debt, and the high interest rates make it difficult to escape.

3. If you can’t afford it, put it on a credit card.

Okay, this isn’t actually something many people consciously think, but many people see credit cards as tools to make purchases they don’t have cash to cover. Although credit cards do allow you to buy things you can’t afford, they should never be used this way. Once you start spending money you don’t have, you can fall into the pit of credit card debt very quickly.

Credit cards aren’t for everyone, but they have some serious advantages for those that use credit cards responsibly. Earlier this year, we released a show that dives deeper into the history of credit cards, when you should not use a credit card, and how to use a credit card like a millionaire.