5 dangers of carrying credit card debt in today's high-rate environment (2024)

Credit card interest rates have been climbing steadily over the last decade. During that 10-year stretch, the average credit card interest rate nearly doubled, climbing from about 12.9% in 2023 to nearly 24% today. And between the Fed's rate hikes and pauses, card rates have compounded significantly over the last two years in particular.

The impact of the uptick in card rates has been profound for many cardholders. The total amount of outstanding credit card debt in the United States is currently $1.12 trillion, with millions of households struggling to make even minimum payments — as evidenced by the recent uptick in delinquent credit card accounts. And as the cost of carrying a balance has increased, more Americans are finding themselves trapped in a cycle of debt.

If you find yourself in a similar situation, these credit card debt issues can have a big impact on your financial stability, especially in today's high-rate environment. Below, we'll detail why.

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5 dangers of carrying credit card debt in today's high-rate environment

There are multiple dangers to carrying credit card debt right now, including:

Rapid balance growth

Carrying a balance on a credit card can lead to exponential debt growth. For example, if you're paying just the minimum (interest plus 1% of your balance) on a $5,000 balance at 24% APR, the interest would accrue to about $1,200 in just one year. As that balance compounds, it can be increasingly difficult to pay down the principal. You may find yourself owing multiples of your original balance within a few years, for example, which can lead to a situation where even basic necessities purchased on credit become unaffordable luxuries in the long run.

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Minimum payment trap

As balances grow, so do the minimum payments owed on the account. However, these payments are often structured to cover little more than accrued interest. In turn, if you only make minimum payments, you may find yourself barely making a dent in your principal balance, potentially taking decades to pay off relatively small initial purchases.

This trap can have far-reaching consequences. It can drain resources that could otherwise be used for your savings, investments or important life milestones. And the extended repayment period exposes you to a greater risk of financial setbacks that could derail your debt repayment plans entirely.

Credit score damage

High credit card balances relative to credit limits can significantly damage your credit score. This not only makes it harder to qualify for new credit but can also lead to higher interest rates on other forms of borrowing, such as mortgages or auto loans.

And the ripple effect can be profound. It might result in you being denied rental applications, facing higher insurance premiums or even losing out on job opportunities. Ultimately, the long-term cost of a lowered credit score can amount to tens or even hundreds of thousands of dollars over a lifetime.

Risk of default

As your card debt becomes unmanageable, the risk of defaulting increases. This can lead to collections actions, lawsuits and long-lasting damage. For example, if you're sued and lose in court, your creditors may pursue wage garnishment or asset seizure, further destabilizing your financial situation. The legal fees associated with defending against these types of actions can add significantly to the overall debt burden, too.

Opportunity cost

The money spent on interest payments represents lost opportunities for wealth building. Funds that could be invested in retirement accounts, used for education or put toward homeownership are instead funneled to credit card companies. For example, $10,000 spent on credit card interest over a decade could have grown to over $20,000 if invested in a diversified stock market fund, assuming average market returns.

Credit card debt relief solutions to consider

If you're struggling under the weight of your credit card debt, there are debt relief solutions that could help, including:

• Debt consolidation loans or programs: When you consolidate your card debt, you roll multiple card balances into a single, fixed-rate loan, which can simplify repayment and potentially save thousands of dollars in interest.
• Credit card debt forgiveness: Some credit card companies may be willing to negotiate and accept a lump-sum payment that's lower than your current balance if you're at risk of fully defaulting on what you owe, essentially forgiving a portion of your balance.
• Debt management: With a debt management plan, experts try to negotiate with creditors to lower your interest rates or waive certain types of fees, making it more affordable to pay off what you owe.
• Hardship programs: Many card issuers offer temporary hardship programs that provide reduced interest rates or payment deferrals for those facing short-term financial difficulties.
• Bankruptcy: While a last resort, bankruptcy can provide a fresh start for those overwhelmed by unsecured debt, but the long-term consequences should be carefully considered.

The bottom line

As credit card interest rates remain at high levels, it's important to try to manage and reduce your credit card debt. By taking proactive steps, you can protect yourself from the compounding dangers of high-interest credit card balances. And if you're already struggling with credit card debt, it's crucial to remember that help is available. The key is to act decisively to avoid your debt from becoming an insurmountable financial burden.