Perhaps nothing symbolizes debt more than the credit card. Used judiciously, credit cards are useful financial tools. Unfortunately, far too many of us fail to use them in a manner that's consistent with long-term financial health -- something that often puts us in a downward debt spiral we can't seem to stop.
According to recent data, total U.S. credit card debt is expected to exceed $1 trillion this year. Improving economic conditions have made consumers more willing to carry debt, and lenders more eager to extend credit cards to borrowers. According to the Wall Street Journal, the number of new general purpose credit cards issued this year will reach 60 million -- nearly double the total from 2009. Additionally, banks are busy raising credit limits to existing card holders, offering the opportunity to go even deeper into debt.
This is a double-edged sword. While it's good news for those who can skillfully manage their finances, those who are forced to rely too much on credit cards can quickly find themselves facing dire financial outcomes -- including an ever-deepening spiral of debt.
With that in mind, let's take a closer look at how to best avoid the pitfalls of the credit card debt trap.
How Credit Card Debt Can Spiral Out of Control
Unlike using student loans to finance an education, credit card debt is often classified as "bad debt" because it doesn't offer any additional utility or benefit. While that's true, there's yet another danger to injudicious credit card use -- the possible creation of a debt trap.
Debt traps often arise as the result of just one bad financial decision that leads to a series of additional poor decisions or outcomes, ultimately leaving a borrower in an ever-worsening financial predicament. In the case of credit cards, this can start with something as small as missing a payment. That missed payment dings your credit score, which may then prevent you from getting a much-needed loan. This, in turn, may force you into pursuing a more expensive non-traditional loan (such as an online lender or cash advance).
If the terms of that non-traditional loan are too onerous, you may quickly fall behind, damage your credit even more and potentially rack up serious fees and repayment penalties. Before you know it, you're struggling to escape a debt trap -- and it all started with that single missed payment.
How to Avoid a Credit Card Debt Trap
Fortunately for borrowers, the rules for avoiding credit card problems are fairly straightforward. First, always thoroughly investigate the terms offered by card issuers. Second, seek out the best possible interest rates and rewards programs. When you've identified the best card for you, use it only for necessities.
Additionally, it's important to pay your bills promptly every month, make an effort to pay more than the monthly minimum and keep a close eye on your credit report for any suspect activity. If you're still having trouble meeting your credit card obligations, rein in your spending habits and make significant adjustments to your budget.
One poor decision with a credit card can kick off a deeply negative domino effect, miring you in a debt trap that's difficult to escape. By following the advice outlined above, you can minimize the odds of this happening to you -- and keep your credit score healthy.