How Does Credit Card Debt Affect Your Finances?

Credit cards are a common part of modern life. They offer convenience and flexibility, but carrying a balance can have long-term effects on your financial well-being. Understanding how credit card debt impacts both your income and your wealth is an important step in building a strong financial foundation.

What Is Credit Card Debt?

Credit card debt happens when you use a credit card to buy things and don’t pay off the full amount by the due date. The unpaid balance becomes debt, and the credit card company charges you interest on what you owe. Over time, this debt can grow if you only make small payments or continue to use the card without paying it off.

Credit card debt is a type of liability—money you owe—which directly affects your net worth (your wealth). For a refresher on the difference between income and wealth, see our [Beginner’s Guide to Money Basics].

How Credit Card Debt Reduces Wealth

Your wealth is what you own (assets) minus what you owe (liabilities). Credit card debt is a liability. When your credit card balance goes up, your net worth goes down.

Example:

• If you have $1,000 in savings and $500 in credit card debt, your net worth is $1,000 - $500 = $500.
• If your credit card debt grows to $1,000, your net worth drops to zero.

In other words, every dollar you owe on a credit card subtracts from your overall wealth.

How Minimum Payments Impact Your Income

When you carry a balance on your credit card, you’re required to make at least a minimum payment each month. This payment comes out of your income—money you could otherwise use for saving, spending, or investing.

• Minimum payments are usually a small percentage of your total balance, but paying only the minimum means it will take a long time to pay off the debt.
• The more you owe, the higher your minimum payment, which can take up a bigger portion of your monthly income.

Impact:

• Less money available for other expenses or savings.
• Harder to build wealth because more of your income goes toward paying off debt.

The Role of Interest Rates in Debt Growth

Credit cards often have high interest rates—sometimes 20% or more per year. If you don’t pay off your balance in full, interest is added to what you owe each month. This means your debt can grow quickly, even if you’re making payments.

• Interest is the extra money you pay for borrowing. The higher the rate, the faster your debt grows.
• Over time, you might pay much more than you originally borrowed.

Example: If you owe $1,000 on a card with a 20% interest rate and only make minimum payments, you could end up paying hundreds of dollars in interest before the debt is gone.

Simple Example: Credit Card Debt Over Time

Let’s look at a basic scenario:

• You have a $1,000 credit card balance.
• The card charges 20% interest per year.
• The minimum payment is 2% of the balance ($20 to start).

If you only pay the minimum each month and don’t add any new purchases:

• It could take over 5 years to pay off the debt.
• You might pay more than $500 in interest alone.
• Your wealth stays lower for longer, because your savings are going to interest instead of growing.

This example shows how credit card debt can stick around and cost much more than you expect.

Tips for Managing Credit Card Debt

1. Pay More Than the Minimum: Even a small extra payment each month can help you pay off debt faster and save on interest.
2. Track Your Spending: Know where your money goes so you don’t overspend on your card.
3. Avoid New Debt: Try not to add new purchases to a card you’re working to pay off.
4. Create a Repayment Plan: Set a goal for when you want to be debt-free and make a plan to get there.
5. Understand Your Interest Rate: Check your card’s interest rate so you know how much your debt is costing you.
6. Ask for Help if Needed: Many organizations offer free credit counseling to help you manage debt.

Connecting Back: Credit Card Debt, Income, and Wealth

Credit card debt is a clear example of how liabilities can reduce your wealth—even if your income is steady. The money you spend on interest and payments is money you can’t use to build assets or grow your net worth. By understanding the impact of debt and taking steps to manage it, you can protect both your income and your long-term financial health.