Debt is a way of life in the United States. The average American has \$3,600 in credit card debt. This number seems small, but does not convey the complete story. When I say average American, I am including those without any credit card, those who have credit card(s) but do not carry any balance and those who carry a balance on their credit card(s). Now, I can assert more strongly that the average American debt is a number with significance.

\$3,600 in credit card debt with an average variable credit card interest rate of 16.1% translates to nearly \$600 in credit card interest alone. This interest has a compounding effect. Suppose your debt is allowed to accumulate for 5 years, you will owe close to \$25000. This includes the amount you spent on purchases (\$18,000) plus the interest amount over 5 years (\$7000).

Can you take a bite into an apple pie that you will bake tomorrow? Suppose someone comes to you with an apple pie and says that you can have it today if you promise to bake the exact same pie and give it to them the next day. Will you accept that deal? Maybe, but what if you have to work late tomorrow? Or you have a PTA meeting? Or a doctor’s appointment? You would probably decline the offer.

In another situation, if someone offers you an apple pie and says you can give them one in return whenever you bake it, but for every additional day, the number of pies would go up by one. In this scenario, you would think to yourself, “Tomorrow I work late, day after I need to fix my truck". "I will have to bake him 3 pies at minimum”. And thus, you turn down the offer. You are likely to refuse biting into the delicious apple pie that is right in front of you because you disliked the string attached to it. Why is it different with credit cards? The bank presents you with an offer saying they got your expenses for the month covered if you promise to pay them back next month. For every month you delay the return, they increase the amount you owe them. How come this attached string became so agreeable?

Why 0% APY is a trap?

A 0% APY (for first 1 year or so) credit card is like a neighbor offering you a pie with no strings attached. Here is some information that would perhaps benefit everyone in the long run. Financial institutions never offer anything without strings attached. The 0% APY is a technique to lure spenders to accumulate the debt without having to pay back for a while. It so happens that most credit card users accumulate more than what than can pay off once the interest rate goes up.

How much debt is too much?

I mentioned that \$3,600 is the average American’s credit card debt. You know how close you are to this value. Debt quantity is subjective and should be assessed based on the individual’s ability to pay back. If you are having investments yielding way over the credit card interest rate (if yes, I would appreciate some insights on what kind of investments those are) and thereby, make market gains significantly above the amount you owe as interest, then you are probably doing the right thing by having such debt.

Most individuals have the debt without the means to pay it back. Take a moment and assess your credit situation. Can you pay back the current credit card debt with existing cash reserves? If yes, what is stopping you from doing it?

If you have too much credit card debt:

Kudos, you have recognized this. Awareness of the problem is the first step to getting out of debt. Next step is to slowly work on fixing it.

1. Stop using credit cards:

This may be easier said than done, but it would be advisable to use debit cards or cash until your debt levels are under control.

2. Use the 0% APY with caution.

To avoid paying high interest rates currently, you could get a credit card that offers 0% APY at the start and do a balance transfer from your current card(s) to the new one. This is just the first step. If not followed up by remediation, you will be back in square one and towards the path of being buried in debt.

Work on paying back the balance slowly while following Step 1 for current expenses.

3. Negotiate for a lower interest rate

If you do not qualify for Step 2, negotiate with your current card provider for a lower rate. Express your commitment to repaying the debt in full and explain why the current rates are unaffordable. If you are successful in getting a lower rate, work slowly towards clearing the debt while making current transactions by following Step 1.

Prevention is better than cure

Prevention is better than cure. When the interest amount catches the user’s attention at early stages, it costs less to fix the problem.  It is very similar to detecting a cavity and fixing it early than paying for a root canal.