Why Credit Card Debt is So Hard to Pay Off

July 05, 2018 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Why Credit Card Debt is So Hard to Pay Off

Ideally, you would never carry credit card debt, and you’d pay off your statement balance in full every month by the due date. Unfortunately, that doesn’t always happen. Emergencies come up. Budgets get derailed.

If you’re having trouble paying off your credit cards, know that you’re not alone. According to an annual analysis done by NerdWallet, the average household that’s carrying credit card debt has a balance of $15,654 .

It’s not necessarily a problem to have a balance on your credit card—as long as you pay it off every month. In fact, using credit cards for rewards, or to build credit, is a financially healthy choice. And getting into the habit of paying off your statement balance in full by the due date is important.

But if you start to carry a credit card balance, you’re not just paying for your purchases, you’re paying hefty interest charges on your purchases. In fact, the average household with credit card debt pays $904 in credit card interest every year .

The problem is when you don’t completely pay off your credit card, the debt can quickly pile up, even if you’re making the required minimum payments. Understanding how credit card interest and penalties compound can help you understand how to reduce your credit card debt.

How does credit card interest work?

When you applied for a credit card, you likely read about the fees, terms, and APR. APR stands for annual percentage rate and is supposed to be the approximate percentage interest you will pay over the year. APRs vary across credit cards and depend on your credit history, but on average, credit card APRs range from 15% to 20% .

Most credit cards charge compounding interest, which means that you end up paying interest on the interest you accrue. Essentially, the interest is calculated continually and added onto your balance, which you then also pay interest on. For example, if you owe $100 and your interest is compounded monthly at 10%, then after the first month you’d owe $110.

And after the second month, you’d owe $121. Most credit card interest is actually compounded daily, so every day you owe money after the due date, the interest climbs. It’s easy to see how compounding interest can add up.

Interest compounds even if you make the minimum payments. That’s because if you just pay the minimum amount due on your monthly credit card bill, then the remainder of the debt still accrues interest, and it compounds until you pay the balance off completely. If you are wondering how much interest you will pay on your debt, use our Credit Card Interest Calculator to find out.

What happens when you stop paying your credit card?

Unfortunately, you can’t just ignore credit card bills until they go away. If you stop paying your credit card, your balance can inflate quickly.

If you miss a payment or don’t make the minimum payment due on a bill, you will typically face a late fee or penalty. In addition, the amount you still owe on the credit card—whatever you didn’t pay—continues to accrue interest, and that gets added onto future bills.

If you miss more than two payments, then your interest rate will likely increase to a higher penalty interest rate. And once your credit card interest rate goes up to the penalty rate, it usually stays there until you make at least six on-time payments. Those details are laid out in your credit card contract, even if you didn’t read all the fine print!

If something does come up and you know you’re going to be late on a credit card payment, you should contact your credit card company. Some credit card companies will offer plans to allow you to pay off just the interest or a portion of the payment due.

These options aren’t ideal, since the remaining debt still accumulates interest, but it may allow you to avoid having a delinquency on your credit report. After 90 days of being delinquent on credit card payments, the credit card company could offer you a settlement, or they could attempt to get a judgement against you for the total amount owed. They could also sell your debt to a collection agency.

Even if you always make the minimum payment due, if you’re not paying off the full credit card debt, then the remainder will still accrue compounding interest. That can still add up, and the debt can start to feel insurmountable. But there are ways to lower your interest rate and get rid of your credit card debt.

How do you lower your credit card interest?

If you’ve accumulated a large amount of credit card debt, then it might make sense to pay it off with a lower-interest loan or credit card. Balance transfer credit cards allow you to transfer your credit card debt onto a lower-interest card, and then pay off that card. However, these cards often come with fees and a high interest rate that kick in after a certain date. So essentially, you are setting yourself up to face the same problem all over again.

Another option is to take out a personal loan with a much lower interest rate, and use that to pay off your credit card debt. Essentially, you use the personal loan to pay off your credit card(s), and then you just have to pay off the personal loan.

The interest rate on personal loans tend to be fixed, so the interest won’t compound and the rate won’t change. Personal loans just require you to make one simple monthly payment, and you can work with the lender to find a repayment timeline that works for you.

To get out of credit card debt sooner and save money on interest, check out a SoFi personal loan.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
PL18145

TLS 1.2 Encrypted
Equal Housing Lender