The One Type Of Debt That's Doing Sneaky Damage To Your Net Worth

The cost of living for young people in America today is certainly more burdensome than it ever has been before. For example, in just 2022, food prices alone rose more significantly than in any other year outside of 1979, making it the most expensive year to buy groceries in over 40 years. The price of housing has also become quite troublesome for the average American as well, seeing as in the five years between February 2017 and February 2022, the average price of rent rose by 18%. This is a figure that alone outpaces the growth of inflation during the same period.

This being the case, it should probably come as no surprise that many young people have turned to taking on credit card debt as an attempt to cover their many financial burdens. According to a report by the New York Fed, total credit card balances of Americans have risen nearly 6% since 2023, totaling at a whopping $1.14 trillion altogether. Due to the aforementioned rise in costs in the country and the fact that wages have failed to keep up with inflation, it's understandable that a good amount of this debt undertaken may have been unavoidable for many. However, at the same time it's still important to understand how credit card debt can affect your financial status. That being said, let's take a look at how exactly credit card debt can cause sneaky damage to your net worth, and potentially even some ways it can be avoided altogether.

Depending on your current socioeconomic status, racking up credit card debt may be unavoidable. Utility bills and rent can certainly add up pretty significantly especially if you live in a major city or certain states with higher energy and rent costs. However, the problem with getting into too much credit card debt without having the financial means to pay it off is that it will likely result in you having to pay back significantly more than you charged to your credit card in the first place. The reason for this is simple: interest rates.

As of December 2024, the average credit card interest rate in America is 24.37% APR (and your credit card interest rates may have just gone up), and the average credit card debt is somewhere around $8,674. Now let's say this is your current credit card debt situation. For simplicity's sake, let's also assume that your minimum payment each month is going to be something like 2% of the total balance. If you were to only pay the minimum payment amount each month, it would take you something like 88 years to fully pay off your credit card. At that point, the total interest you'd have incurred during that period of time would be upwards of $76,000. When you put it like that, it's pretty apparent that making the minimum payment on your credit card every month is not an adequate way to get yourself out of debt.

Ultimately, the way that credit card debt negatively impacts your net worth is that it limits your ability to invest and save money. This is because when you have a large amount of credit card debt, the smartest thing to do is to pay that off before you spend money anywhere else because that debt will incur interest. With the national average of credit card interest rates so high, having a large amount of credit card debt means you will build up a lot more debt on top of the debt you already have pretty quickly. This is not good for obvious reasons.

Now obviously you can choose to only pay the minimum monthly payment, forget about the massive amount of credit card debt you are racking up, and save and invest money regardless. However, that credit card debt is going to spiral out of control relatively quickly, and if it gets to the point where you have maxed out your card, then it will get sent to a collection agency. This is bad because it will negatively impact your credit score pretty significantly. This will greatly affect your ability to do things like rent an apartment, lease a car, or even buy a home if that's in the cards for your future.

What is the solution to getting yourself out of credit card debt so that you can maintain a healthy net worth? Well, the most obvious answer is to avoid charging your credit card on purchases that you can't afford to pay off every month. Of course, if that is unavoidable, the next best thing to do is to focus on paying off your statement balance on whichever credit card has incurred the most debt with the highest interest rate. A large amount of credit card debt can spiral out of control pretty quickly, especially if the interest rate is over 20%. Alternatively, if you want to attempt to minimize your interest rate, try calling your credit card company and working that out with them.

If any of the above options are not possible for you, the next thing you can do is turn to debt relief options like a credit card debt forgiveness program. These will allow you to pay a lump sum of money that is less than what you initially owe to your creditors in order to get yourself out of debt. However, it is worth noting that this should only be done as an absolute last ditch effort. This is because many of these debt relief programs will charge you somewhere in the range of 15-25% of the debt you're attempting to pay off for their services. Of course, avoiding unnecessary spending and other credit card mistakes is a must.