Credit card debt is among the most common sources of debt among Americans today. While many manage to keep their credit use in check, many others have multiple cards and outrageous balances. In order to ensure your credit cards are reflecting a healthy financial profile, ask yourself these questions:
Do I rely on credit cards to pay every day expenses?
One sign that you could be suffering a financial hardship is the reliance on credit cards to cover the costs of gas, groceries, and even bills. If you are choosing to use credit cards and pay off that amount plus more towards your balance, that is a different story. It is the unavoidable use of credit cards to fund these types of purchases that could be a flag for a bigger problem.
Do I know how much I pay in interest every month?
Most people are unaware how much they pay in interest fees alone each month. Even if you do know your actual interest rate, chances are you haven’t actually thought about how much of that is soaking up your monthly payment and not getting credited towards your balance. If you have a $5,000 credit card balance with an APR of 12% (pretty low in for most people), your monthly minimum payment is around $100 and $50 of that is interest only; meaning your balance the following month is only $50 less. At this rate, you will have only paid about $600 towards your balance after a year, leaving you with a $4400 balance.
Do I pay only the minimums each month?
Paying on the minimums isn’t uncommon, but it is often the worst credit card debt repayment strategy possible. Continuing with the example from the interest fees each month above, paying only the minimum on a $5000 balance will take you 259 months to pay back that balance; that is 21 years! Further, you will have paid $4500 in interest payments over those 21 years, almost as much as the original balance. So if you are only able to afford your minimum monthly payment, you should take a step back and evaluate a better plan for resolving your debt.
Do I know my debt-to-limit ratio?
People often use their credit cards without any regard to the debt-to-limit ratio. Meaning, carrying a balance higher than 30-40% of the total available spending limit is likely to lead to struggles with repayment and a damaged credit score. Credit scores can easily be diminished by balances that are too high for the total available credit. If you don’t know how much your debt-to-limit ratio is, take your debt balance and divide it by your limit. Take this number and multiply it by 100 to get your percentage. Anything less than 30% is considered satisfactory, anything over 30-40% should be addressed and reduced as soon as possible.