Understanding Why Credit Card Debt Can Be Difficult to Pay

Many people have struggled or are struggling with paying off credit card debt. This is quite a common phenomenon, and there are various reasons why credit card debt can be hard to pay back. 

Debt can increase significantly because of how charged interest can add up. Different factors affect this situation, and it always helps to understand how the entire credit card debt system works for one to deal with this serious financial issue. 

Read on to learn everything one needs to know about credit card debt. 

Credit Card Interest

Typically, interest for credit cards is compounded on a daily basis. This just means that if one has an 18 percent annual percentage rate (APR), this number will be divided by 365 (the days in a year) to obtain the total amount of interest that is charged per day. Do note, though, that interest rates are usually shown as yearly percentage rates. 

The outstanding balance is always used as the base calculation to determine the amount of interest that will be charged. For example, if a credit card carries a $10,000 balance at 18% APR, the charge will be computed as shown below:

$10,000 (average balance) x .015 = $150 interest

Given this, the minimum payment each month will be $150. After paying this minimum, the remaining owed amount is calculated as follows:

$10,000 – $150 = $9,850 

But since there is interest to pay, the final calculation will look like this:

$9,850 x (18%/12 months) = $147.75

Then, the final balance will be:

$9,850 + 147.75 = $9,997.75

Implications 

Given the process above, only paying the minimum monthly payment is one reason that paying off credit card debt can take too long. It is recommended to pay an amount larger than the minimum—ideally, the total owed each month—to lighten the burden significantly. 

What are other tips that can help pay off credit card debt quickly? Read on.

• Cutting Up the Credit Card

Taking the initiative to cut a credit card is actually critical in staying away from further debt. It is always wise to live only within one’s means, and this includes not owning a credit card if one can not afford to maintain and pay for it. 

• Paying More than the Minimum

As already emphasized above, paying only a minimum per month is a mistake that can cost someone’s fortune in the long run. Disbursing even just $100 to $200 more is an effective way to pay off credit card debt quickly. 

• Staying Away from Unproven Pay-Off Strategies

Seeking instant pay-off techniques such as balance transfer and refinancing can do more harm than good to a person in credit card debt. As long as one follows the first two tips, there is nothing else to do but work and earn to pay off the debt. This sounds simple, but it is critical in getting out of debt. 

Conclusion

Credit card debt is a tough situation that is not easy to solve. In addition to learning everything there is to know about it and how interest is computed, it also pays for one to have an accurate idea of how much they owe. Overcoming this challenge also requires making sacrifices and necessary adjustments to one’s lifestyle and spending behaviour. 

In need of personal debt solutions in Canada? Turn to Debt Helpers, a company offering a range of consulting services and debt solutions designed to help clients become debt-free. Get in touch today!