What Is One Pitfall of Credit Cards?
Understand the core financial challenge credit cards present, impacting your budget and repayment timeline.
Credit cards offer a convenient way to manage daily expenses and provide financial flexibility for unexpected situations. They enable purchases without immediate cash and can be useful for tracking spending. Despite these advantages, credit card use comes with significant financial considerations that can impact personal finances.
The Accumulation of High-Interest Debt
A financial challenge associated with credit cards is the rapid accumulation of high-interest debt. When a credit card balance is not paid in full by its due date, the outstanding amount becomes subject to the card’s Annual Percentage Rate (APR). The average APR for credit card accounts assessed interest was around 21.95% in early 2025, rising to about 23.99% later that year. This high rate means that even modest purchases can quickly lead to a substantial balance if not managed diligently. The ongoing application of this interest can cause the debt to grow, making it increasingly difficult for cardholders to pay off the total amount owed.
How Minimum Payments Contribute to Debt
Credit card statements often present a minimum payment option, which represents a small fraction of the outstanding balance. This payment is calculated as a percentage of your balance, often around 1% to 4%, sometimes with added interest and fees. While making this minimum payment helps avoid late fees and keeps the account in good standing, it significantly slows the reduction of the principal balance. A large portion of the minimum payment often covers accrued interest, leaving only a small amount to reduce the actual debt. This mechanism can trap cardholders in a cycle where they continuously pay interest without making substantial progress on their debt.
The Cost of Carrying a Balance
Not paying off the full credit card balance each month results in interest charges that compound over time. Credit card interest compounds daily, meaning that interest is calculated not only on the original balance but also on any interest that has already accumulated. This “interest on interest” effect can cause the total amount owed to increase at an accelerating rate. Consequently, items purchased on credit can end up costing substantially more than their original price due to these compounding finance charges. This ongoing cost represents a financial burden and an opportunity cost, as money spent on interest could otherwise be used for savings or other financial goals.