If you find yourself unable to pay off your credit card debt each month, you’re not alone. According to a survey from Bankrate, 49% of U.S. cardholders carry credit debt month to month. To avoid interest, the rule of thumb has been to pay off your balance each month. But that’s often easier said than done, especially when the average credit card interest rate is at 24.84% as of July 2024.
If you’re thinking about carrying debt over to the next month or already have, here are the two main reasons why you should strive to keep your balance low.
1. You’ll end up paying more money than you borrowed.
There’s just no way around it: When you carry a balance on your card from month to month, you’ll be paying interest. The higher your balance is, the more you’ll end up paying. As you put more dollars on your card, paying down your balance will only get tougher. When you break down the interest you pay, it may not seem like a lot, but interest compounding on top of more interest over time racks up. Carrying a high balance is also considered an indication that you’ll end up in toxic debt.
2. Your credit score may take a hit.
As you accrue more debt and interest on top of that, paying down your debt becomes more challenging. If you miss payments or are late, you run the risk of hurting your credit score. But the biggest factor you should consider is your credit utilization ratio, which impacts your credit score by 30%. Your credit utilization is the portion of your credit that’s available. Typically, you want to keep this below 30%.
Rebounding from bad credit card habits
To show your lenders you can manage your spending, make sure you’re paying on your loans each month. If you can, try to pay more than your minimum, so you can pay down your debt faster and repair your credit utilization ratio. If you’re having difficulty handling your debt, try talking to a credit counselor. They can help you create a budget that works for your specific household.
Finally, if you still need help getting your credit cards back under control, talk to a credit counselor about a debt management plan. This allows your counselor to work with your creditors to reduce your interest rate and consolidate your credit cards into one affordable monthly payment, all to be paid off in three to five years.
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