Credit Card Debt: The Definitive Guide

What is Credit Card Debt?

Credit card debt results when you make a purchase with a card issued by a credit card company. At the end of a billing cycle, your credit card issuer will send you a statement with the total amount that you owe. If you do not pay off your credit card balance, the remaining balance is considered your credit card debt.

Debt accumulates based on interest and penalties until you’ve repaid all of the money that you owe to the credit card issuer.

Revolving vs. Non-revolving Credit

There are two types of consumer credit: revolving and non-revolving credit. 

Revolving credit is a type of credit that you can repeatedly use up to a certain limit and pay back over time. Once you’ve paid it back, your credit limits will be refilled so you can reuse and repay them. The cycle repeats until you close the account. Credit cards are a type of revolving credit.

Non-revolving credit, on the other hand, is a type of credit issued by a financial institution as a lump sum on a one-off basis. You must repay the credit in installments over a fixed period of time. After it’s paid off, you cannot reuse it. A mortgage, student loans, or an auto loan are all types of non-revolving credit.

How APR impacts Credit Card Debt

Your credit card balance comprises two things:

• The first is your principal balance or the amount that you’ve actually borrowed from the credit card issuer.
• The second is interest, or the percentage that is added to your bill each billing cycle that you do not pay off your full balance.

The percentage that determines how much interest you owe is called the card’s annual percentage rate, or APR. The APR for each credit card is different, and it’s set by the credit card issuer. In Q2 2024, the average credit card APR in the U.S. was 21.51%.

Credit card debt example

• • Say you use your credit card to pay $1,000 for a new sofa. Let’s also say that your credit card APR is 21.51%.
  • At the end of your billing cycle, your credit card issuer will send you a bill with a balance of $1,000.
  • Best case scenario: You pay off the full balance ($1,000). You will not owe any interest, and you will avoid credit card debt for this billing cycle.
  • However, if you only pay the minimum amount due — say $50 — then you’ll carry a balance of  $950 over to next month. At that point, your credit card will begin accruing interest at a rate of 21.51%, typically on a daily basis.
  • The combination of your principal balance plus the interest that you owe is considered your outstanding credit card debt.

U.S. Credit Card Debt Statistics

In Q3 2023, credit card debt in the US totaled $1.07 trillion, according to Experian, a 17.3% increase from Q3 2022.

Here are some additional statistics regarding credit card debt in the US:

Number of Credit Card Accounts: 

• • 2022: 526.2 million
  • 2023: 568.6 million

Average Credit Card Balance

• • 2022: $5,910
  • 2023: $6,501

Average Credit Utilization Rate: 

• • 2022: 28%
  • 2023: 29%

Good Debt vs. Bad Debt

Credit card debt is not considered a good thing, but there is a reason for that. It’s about more than just the feeling of regret when the time comes to pay your bill. Contrary to popular belief, not all debt is bad debt. There is a difference between good debt and bad debt.

• Good debt is an investment that increases your net worth or sets you up for financial success in the future. Types of good debt include a mortgage, home equity loans or lines of credit, small business loans, and student loans (in most cases).
• Bad debt is something that you pay for with credit that depreciates over time or does not generate income for you. It drains wealth and doesn’t have the prospect of paying itself off.

How to Manage Your Credit Card Debt

In this section, you’ll learn how you can take action to overcome credit card debt. These tips will not be one-size-fits-all. Your debt journey is personal. Your debt solution should be, too.

1. Monitor and Lower Your Credit Card APR

When it comes to finances, you have a lot more control than you might realize. One way to take control of your finances: Take a proactive approach to your credit card APR.

You might not have luck negotiating your interest rate with your credit card company initially. But you can think of this as something you can do once you’ve established to your issuer that you’re a good borrower.

Interest rates fluctuate with the market. Both you and your lender have the power to tip the scales. Some reasons that you might want to lower your interest rate include:

• • Your financial situation has improved since becoming a borrower
  • You’re experiencing financial hardship

In both cases, you can reach out to your lender to negotiate a lower interest rate.

2. Make a Payment Strategy

The best method for paying off credit card debt is the one that you can stick with. There are several approaches to paying off your debts if you have multiple credit cards.

• Debt avalanche. This involves knocking out the debts with the highest interest rates first. First, you make the minimum payment on each of your cards. Then, you dedicate any remaining money to the card with the highest interest rate.
• Debt snowball. The main idea behind this approach is to pay off the cards with the lowest amount of debt quickly. In turn, this will motivate you to keep working toward your goal of being debt-free.

3. Make more than the minimum payment

It is crucial that you pay at least the minimum amount required by your credit card issuers by your due dates. If you don’t, your lender will charge you late fees and other penalties. This will make it even harder for you to pay down your debt in the future.

Better yet, pay more than the minimum amount when possible. Not only will your overall balance decrease, but so will the amount of interest that you accrue. Remember: Interest compounds.

To make your job a little easier, don’t think about credit card payments as all or nothing. Break your payments up into smaller amounts throughout the month so you can more evenly distribute them. Then, when you have a little extra cash, put it toward your credit card debt. It doesn’t matter how or when you repay your credit card debt — as long as you make at least the minimum required payment by the due date.

4. Automate Your Payments

Setting up automatic payments for your credit card bill can help you avoid late payments or missed payments. Autopay is convenient, eliminates clutter, and can actually cut down the cost of your bills in some cases.

However, if you set up autopay, you have to be wary of overdraft fees and overpaying on your bills. When you pay your bills automatically, you are not forced to review your bills, which can help you identify when there are issues with your services.

So, if you use autopay, be sure to check in on your bank account regularly to make sure there are enough funds in there. You should also check your bill statements to ensure you are not paying for things that you no longer want or need.

5. Debt consolidation

Debt consolidation is a personal finance strategy that allows you to combine multiple loans into a single monthly payment. You can consolidate debt using a balance transfer credit card or a debt consolidation loan.

• Balance Transfer Credit Cards are great if you can qualify for them. With a 0% introductory APR, you can pay off your credit card debt quicker and with less interest if you make consistent, on-time monthly payments. However, it’s important to maintain a strict monthly payment schedule with balance transfers. The standard introductory time period for a balance transfer credit card is 6 to 18 months.  If you do not repay your credit card debt by the end of the introductory period, a standard credit card interest rate will kick in. Unfortunately, the post-introductory APR is usually higher than the standard credit card APR. You should also check balance transfer fees.
• Debt Consolidation Loans, on the other hand, are a type of personal loan that typically comes with a low introductory rate that expires after a certain period of time (similar to a balance transfer credit card). Many lenders pre-qualify you for debt consolidation loans. When you’re pre-qualified, the lender only runs a soft inquiry on your credit report rather than a hard inquiry, which means your credit score will not be damaged. Your credit score does, however, determine the rates and terms of your personal loan. In general, someone with a good credit score is rewarded with lower interest rates and larger personal loan amounts. Someone with a lower credit score won’t have access to these offers.

6. Debt management

You can make a debt management plan with the help of a credit counselor or credit counseling agency. With a debt management plan, you follow a structured monthly payment program based on your financial situation.

Since a debt management plan does not involve a loan, there is no credit check process that would affect your credit score. You also have access to reduced rates through many agencies, your program is carefully tailored to fit your financial needs and abilities, and you have access to financial counseling and assistance along the way.

Unfortunately, debt management plans often come with monthly fees. You may also not be able to incorporate all debts into your repayment plan, as secured debts — such as mortgages and auto loans — are not eligible through many agencies.

7. Debt settlement

If you’re unable to pay the full amount of your credit card debt, you can work out an agreement with your lender to pay a smaller amount. This is called a debt settlement, debt relief, or debt adjustment.

Essentially, you agree to give your lender a lump-sum payment in exchange for part or all of your debt being forgiven. How much you owe your lender is typically a percentage of how much you’ve borrowed.

A debt settlement company or credit card debt attorney can work as an intermediary between you and your creditor to reach a settlement. Once you’ve come to an agreement, everything goes in writing.

While debt settlement can save you money, it can have negative consequences. Your credit score can drop significantly, your relationship with the creditor may be damaged, and you will likely have to pay a good amount of money to the debt settlement company or attorney that helps you find a solution. It’s always important to weigh your options before rushing into a credit card debt solution.

8. Bankruptcy

If you’ve racked up credit card debt that you don’t foresee yourself being able to repay, you may want to consider bankruptcy. Filing for bankruptcy should be a last resort, as the financial and personal consequences can be significant.

Bankruptcy is a process where you liquidate assets (e.g., real estate, stocks, material goods, etc.) or create a repayment plan to pay off your debts. While bankruptcy does enable you to have a fresh start, it also comes with personal and financial downsides. Not only could you still be responsible for some outstanding debt, but bankruptcy can impact your job, future rental opportunities, and your ability to obtain credit in the future.