Are you tired of feeling overwhelmed by credit card debt? You’re not alone. Millions of people struggle to manage their credit card balances and avoid high interest rates. And these days, it seems you can’t take a step without a financial professional warning about racking up too much debt from credit card use or overuse.

For some, the term “credit card” immediately conjures images of never-ending payments and ballooning debt. However, credit cards and a mountain of debt don’t necessarily have to go hand in hand. What if I told you that mastering credit card debt is simpler than you think? Many credit card holders manage to use their cards regularly without creating problems with ballooning debt, and some, even savvier individuals use it without ever paying interest. In this article, we help you understand your credit card, discuss how to manage credit card debt and take control of your financial future.

Credit card debt owed by Jamaicans, as measured by commercial bank credit card receivables, has been trending up in recent years. For the calendar year 2022, total credit card receivables in domestic currency amounted to $752.86b, and for the similar period in 2023, the value rose 16.7 per cent to $871.52b, according to data from the Bank of Jamaica (BOJ). The uptrend is likely due to the increasing availability of credit cards as banks, aided by their ability to better leverage their data and assess credit quality, are offering credit cards to more individuals. The BOJ, in its annual 2023 report, noted that credit cards in circulation as at November 2023 amounted to 407,534, an increase of 6.2 per cent when compared to November 2022. For the calendar year to November 2023, credit card transactions processed on the proprietary systems of deposit-taking institutions (DTIs) totalled 33.58 million, valued at $893.52b. These figures represented a decline in volumes of 5.6 per cent to 1.98 million and an increase in value of 10.7 per cent to $86.19b, relative to the same period in 2022. Further, increased access to online shopping and e-commerce in general, along with the rise in cost of living likely also drove more individuals to utilise their cards to meet cash flow gaps. Outside of these factors, there is also a lack of understanding of how to use credit cards responsibly, which could also be adding to the rise in credit card debt. These factors among others are expected to continue contributing to the rise in credit card debt.

If you happen to fall in this bracket, now is the time to equip yourself to get your credit card usage under control.

How do I use my card responsibly?

Credit cards are very useful financial tools in today’s digital world. However, it’s crucial to remember that using a credit card means borrowing money that must be repaid — at very high interest rates too — if balances are not paid off on time and in full. Therefore, it is essential to fit repaying any amount you spend through your credit card within your regular monthly household budget.

Responsible credit card usage involves thoroughly reviewing all terms and fees, doing your research, and asking questions to aid your understanding of how the card works and better manage how you use it. You need to understand your card before you begin to use it. How is the interest calculated? How does making a minimum payment impact the pace at which your credit card balance will grow? Paying more than the minimum payment and keeping your card balance low are also responsible ways to use your credit card. Credit cards charge compound interest — interest on your balance and on the interest that accrues — which can get expensive.

Credit cards are also unsecured debt, which means the interest rates are very high for any unpaid balance after the payment due date. Of note, interest rates charged on credit cards range from a minimum of 37 per cent to as high as 53 per cent. To avoid accumulating interest, pay your statement balance in full on the due date. If you can’t pay the entire statement balance, pay as much as you can. Remember also that rates differ from card to card, so it’s key to understand the rate associated with your particular card. Paying significant amounts in interest monthly can trap you in a cycle of escalating debt, diverting funds that could otherwise be saved or invested to build wealth. This can hinder your ability to achieve a financially secure future.

Responsible credit card usage also means properly servicing your debt to avoid it ballooning or impacting your ability to borrow for other purposes, such as buying a home or a car. Late payments can result in hefty late fees and trigger a penalty annual percentage rate (APR), significantly increasing the interest you pay and causing your outstanding balance to balloon. Making a minimum payment is better than missing a payment, but paying your credit card bill in full every month is ideal. If you pay your credit card bill in full on or before the payment due date, your credit card can serve as an interest-free, short-term loan that can help you manage your cash flow. Moreover, your payment history heavily influences your credit score and a late payment can damage it, affecting your ability to secure loans or to do so at favourable terms. A bad credit history can potentially hinder your ability to build wealth.

Why are credit card rates so high?

One of the things that customers complain bitterly about is high interest rates on their cards. Credit cards carry significantly higher rates because they carry more risk to the issuers than other loans that are in fact secured. Secured loans are backed by collateral, for example, a home, a car, etc. As such, secured loans provide lenders with a safety net — if the borrower defaults, the lender can seize and sell the collateral to recover their funds, reducing the risk, which is why interest rates on mortgages and car loans are lower. Credit cards, however, are unsecured loans making them riskier for lenders. With average credit card interest rates above 20 per cent, even as much as 50 per cent, the best thing you can do is strategically manage your debt and pay your bill off in full or as large a payment as possible each month. Therefore, if you only pay the minimum balance each month you could see your outstanding balance double or even triple over time.

Why are credit cards so widely issued and used?

Credit cards offer significant benefits both to the issuer and the cardholder. For financial institutions, credit cards are highly profitable. They generate revenue through interest charges on unpaid balances, annual fees, late fees, and transaction fees from merchants, so banks have a very high incentive to issue them. For individuals, credit cards offer numerous advantages, such as convenience, the ability to make purchases without immediate cash, and access to emergency funds to cardholders. Used right, they are an effective, secure, cash flow management tool for consumers. They also allow for more secure ways to transact relative to walking around with cash. Many credit cards also provide rewards, such as cashback, travel points, and discounts, which can be very appealing. Additionally, responsible credit card use can help build a positive credit history, leading to better borrowing terms for loans in the future. Overall, the balance of profitability for banks and the benefits for consumers is why credit cards are widely issued and used despite the potential risks of debt.

Bottom line

Credit cards are not the problem; the misuse of them is. They are a useful tool to manage finances for today’s household, offering convenience, security, and potential rewards. Yet, their misuse can lead to significant financial pitfalls, primarily through high interest rates and accumulating debt. Understanding and practising responsible credit card usage is essential for maintaining financial health. By paying bills on time, managing balances wisely, and staying informed about interest rates, you can navigate the complexities of credit card debt effectively. Empower yourself with these insights to take control of your financial future, ensuring that credit cards work for you, not against you.