Most Americans Remain Unaware of This Debt-Erasing Credit Card Trick: Report

A survey by Debt.com also reveals how consumers set themselves up for financial heartbreak with their credit card habits.
A couple looks stressed out as they stare at their laptop.

Credit cards unlock for many a life of financial freedom and convenience, giving them access to the goods and services we want without having to immediately pay upfront. But the card's seductive ease of use also traps millions of Americans into debt if they can't figure a way to settle up on time. A recent survey by Debt.com highlights why so many Americans fall into debt with the help of their credit cards and how most of the country remains unaware of one of the best methods to pull themselves out of financial trouble.

When a rainy day becomes your worst day

Unless you have memories of watching President Eisenhower's inauguration on television, credit cards have likely always been an indispensable part of your shopping experience—Debt.com finds more than ¾ of the 4,462 adults surveyed use their credit cards for that purpose. The survey also confirms most consumers (65%) use their cards when dining out at restaurants. Credit cards help keep us from having to lug around a wad of cash everytime we want to hit up a sale or treat the family to a nice meal.

The survey further breaks down how the respondents used their credit cards

Type of SpendingPercentage of respondents using their credit cards for that type of spending
Hotels57.69%
Airfare47.98%
Other travel costs45.30%
Restaurants65.00%
Home repairs40.97%
Medical expenses40.61%
Emergencies58.43%
Bills / covering budget gaps38.83%
Gifts52.18%
Shopping76.67%

More disconcerting is that more than half of the respondents rely on credit cards to cover emergency expenses. From a certain point of view, this would make sense—the Federal Reserve found 40% of Americans can't cover an unexpected $400 expense in cash, making them one blown transmission or a dislocated shoulder away from a financial nightmare.

But unlike this season’s cute pair of shoes or that killer leather jacket, emergency expenses aren't something on which you can take a pass, and eventually you'll have to meet that financial obligation in the form of a credit card bill. In theory, there's nothing wrong with this, so long as you pay off the balance of the credit card before you're charged interest,which typically occurs after a month.

It's time to take an interest in your card

If you don't pay off the emergency expense (and the rest of your credit card balance) before the card issuer charges you interest, that means you are at the mercy of your card's APR (annual percentage rate). The higher your card's APR, the more money you have to pay when you carry a balance from billing cycle to billing cycle (which is usually 30 days).

It's easy to see how this can quickly spiral out of control to the point where you're throwing money away at paying interest while only chipping away at the original balance, causing you to be mired in debt for months or even years. ValuePenguin calculates more than 40% of American households carry credit-card debt, and that those households struggle with an average of $9,333 in total debt. When you compare that number with the $5,700 of debt carried by the average American household (whether they carry a credit card balance or not), it becomes clear that mismanaged credit card spending extracts a heavy financial toll.

Consolidating credit cards

Compounding the difficulty of keeping up with credit card payments is the fact that the debt often exists across multiple cards, each on their own billing cycle and delivered in separate statements. Debt.com's survey reveals nearly a third of the respondents actively use 3 or more cards, and if those juggling multiple cards are carrying a balance on each of them, that means multiple interest payments. Not only is that a lot of paperwork to keep up with, but it's also expensive.

One way to simplify your financial woes is by consolidating that debt onto a single card created for that purpose. Balance transfer cards allow you to shift the balances on multiple cards to a single card for a nominal fee (or sometimes no fee at all, depending on the card). In addition, these cards also tend to have a 0% APR introductory period, which gives you a window of time to pay off the balance without having to waste money on interest. Only 35.2% of Debt.com's survey respondents know about the existence of balance transfer cards, meaning most credit card users aren't aware of one of their best tools to combat runaway debt.

Balance transfer cards aren't a magical cure-all, of course. You're essentially betting you can pay off the consolidated credit card debt before the card's 0% APR grace period is through, an amount of time that depends on the individual card (though it usually ranges from 12 to 21 months). Otherwise, you'll have to pay whatever APR the new card charges after the grace period runs out, which is usually comparable to the APR of normal credit cards. For that reason, ValuePenguin recommends not putting debt larger than $15,000 on a balance transfer card.

James Ellis

James Ellis is a Staff Writer for ValuePenguin, covering credit, banking, travel and other personal finance topics. He previously wrote for Newsweek, Men's Health, and other nationally-published magazines.

Comments and Questions

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Info about the following cards: American Express® Gold Card, Delta Reserve® Credit Card from American Express, Hilton Honors Surpass® Credit Card, American Express® Blue Sky, American Express® Green Card, The Amex EveryDay® Preferred Credit Card from American Express, The Plenti® Credit Card from Amex, Blue from American Express®, Platinum Card® from American Express Exclusively for Mercedes-Benz, Bluebird, Centurion® Card from American Express, Hilton Honors American Express Aspire Card, and Starwood Preferred Guest® American Express Luxury Card has been collected independently by ValuePenguin. The issuer did not provide the details, nor is it responsible for their accuracy.

Advertiser Disclosure: The products that appear on this site may be from companies from which ValuePenguin receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). ValuePenguin does not include all financial institutions or all products offered available in the marketplace.

How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).

{"endpoint":"\/newsletter\/subscribe","style":"blue","title":"Keep up with our news and analysis.","version":"sidebar"}