How Credit Cards Become Debt Traps

How Credit Cards Become Debt Traps

By Michael Peterson
In June 28, 2022

It’s estimated that some 60 million American households regularly carry outstanding credit card balances. According to a WalletHub study, the average household’s credit card balance is $8,425. We know what this means: Carrying a balance (meaning you don’t pay off your total amount due every month) incurs interest (meaning you’re actually paying more than you owe on your card).

But why are so many of us falling prey to this debt trap? By investigating five of the most common reasons why we accumulate those high card balances, in no particular order, we might be able to help you avoid this financial pitfall.

Reason #1. Cardholders just pay the minimum payment amount.

Typical credit card statements show several types of “amounts due.” When you’re submitting payment, you can choose the: 

  • Minimum amount due – the least you can pay by your due date and avoid a missed payment fee.
  • Statement balance – the actual amount due by your due date, including all transactions posted during the current billing cycle, to avoid interest.
  • Current balance – your total account balance, reflecting your current amount due, plus all new transactions since your last statement. 

Many cardholders misunderstand these terms. They believe that if they make the minimum payment, they’re paying what’s due at the time. But while paying the minimum will prevent late fees, it won’t pay down your actual balance. In fact, the minimums are just enough to cover the interest charges, and a very, very small amount of the debt!

What you should do instead: Pay your statement balance every time! Even if you can’t afford to pay the balance in full every month, try to do so as soon as possible. Submit as much as you can afford to get out of debt more quickly and avoid the compiling interest.

Reason #2. Cardholders can spend more than they make.

Using credit means you’re borrowing money to make a purchase. You borrow money as credit, and then you pay back that loan later – with interest. You’re buying “on credit” because you don’t have the cash up front. This makes it super easy for cardholders to outspend their earnings because they aren’t limited to the cash in their wallets or the size of their paychecks.

What you should do instead: Know how much you earn each month, and don’t allow yourself to charge more than that. It may take all of your willpower, but put off major end-of-the-month purchases that will send you over that amount.

Reason #3. Cardholders use credit to cover financial emergencies.

Unexpected expenses can cause huge problems for your finances. A flooded basement, an emergency appendectomy, or a new rear suspension can cost you thousands of dollars – money that, presumably, the 60 million American households with credit card balances don’t have on hand.

house flooding

When they don’t have an alternative, many cardholders will resort to charging those costs. And depending on the size of the bill, that makes it all but impossible to pay off at the end of the month.

What you should do instead: Establish an emergency fund… NOW! Ideally, you’ll want to set aside at least 3-6 months’ worth of living expenses to cover your costs in case you lose your job or experience a major medical event – and then never touch that fund except in true emergencies.

Reason #4. Cardholders can open too many accounts.

Credit card companies make it easy – far too easy! – to apply and get approved for an account. Just think: How many times have you been asked at check-out whether you want to open a card “and save on today’s purchase”? The difficulty is that the more accounts you have, the harder it is to keep track of all of them. This means not only overspending, but also missing payments and accruing late fees and more interest.

What you should do instead: You don’t need to limit yourself to just one credit card, but only open as many cards as you can manage effectively. Don’t allow yourself to be tempted to open others just because they offer appealing perks. Those perks won’t do you any good if you’re drowning in debt.

Reason #5. Cardholders are lured in by rewards. 

Cash back and other credit card perks have become commonplace. And those rewards sure sound sweet! What many cardholders don’t realize is that the value of said rewards is most assuredly less than the interest and finance charges that accrue if they can’t pay their balance in full each month. (Credit card companies are, after all, in business to make money.)

These royalty cards often offer a “welcome bonus” that works something like this: Earn 50,000 extra points if you spend $3,000 within three months of opening the account. Such a bonus entices many a cardholder to charge more than they normally would, just to reach the required minimum. Unfortunately, they’re unable to pay off their balances each month because they are spending above their means.

What you should do instead: Only use your rewards card for purchases you’d make anyway. If you’ve legitimately been in the market for a high-dollar item – say, an energy-efficient washer and dryer or flooring to replace your worn-out carpeting – using a rewards card (especially a new one with a welcome bonus) might earn you some valuable points. But avoid the card-rewards trick if you’re likely to view this as an excuse to go crazy on impulse buys.

Remember, the best way to avoid the financial traps that so many credit card users fall into is to manage your finances well. We recognize that advice like “Don’t go into debt in the first place!” isn’t very helpful if you’re already in debt. That’s why the friendly financial counselors at are standing by to talk with you when you need help figuring out which debt management solutions will work for you.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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