Key Points

  • Credit card debt creeps up because small purchases can add up to huge balances over months or even years.
  • Bill Pay, subscriptions or automated payments can hide credit card growth because you pay the minimum amount due without scrutinizing the bill.
  • Daily compounding interest ads up quickly and increase the original purchase price many times the original amount in a short time.
  • Losing a physical connection to your money makes it difficult or impossible to know where your money goes each month.
Why Your Credit Card Debt Grows So Fast

“It’s just $5,” you think as you reach for the credit card to pay for your morning coffee. It’s hard to believe that this small part of your daily routine contributes to your paycheck-to-paycheck lifestyle. But it does.

David Bach, New York Times Best Selling Author, dubbed this principle, “The Latte Factor”. The concept is quite simple. When you spend small amounts of money consistently, it adds up to substantial amounts of money. In the example above, spending $5 each day you work adds up to $100 a month and $1,200 a year. If you have more than one small spending habit, it costs you thousands of dollars per year.

The result can devastate your finances.

By the end of 2019, US credit card debt hit an all-time high of $930 billion, surpassing the previous peak of $870 billion reached during the 2008 financial crisis. The challenge with maintaining high debt levels is that you never know when circumstances will change your income, expenses, or job prospects.

Spotting the culprits that lead to overspending requires a close look at where your money goes each month.

Don’t Avoid Budgeting

The saying goes, “If you can’t measure it, you can’t manage it”.  So start with a monthly budget, and then track your actual daily expenses to identify where small level spending occurs. You might buy too much on Amazon, order too much take out, or waste hundreds on specialty coffee. Once you identify your financial waste areas, find acceptable alternatives that allow you to enjoy your life without compromising your budget.

We tend to have a natural aversion to budgeting because it feels like someone is telling you what you can and cannot buy. The irony is that you are the person directing the budget. You are telling your spontaneous and rebellious self where you will spend the money you earn.

Instead of seeing a budget as restrictive, view it as a blueprint to guide your spending. A budget should help you identify the highest priority spending and then direct funds to cover those costs. It allows you to prioritize current needs (your monthly bills), past needs (existing debt), and future needs (savings and investments). When you address all three legs of your financial stool, you can live a fuller life without the stress of wondering how you will pay for unexpected expenses when they inevitably appear.

Scrutinize Statements and Monthly Bills

Another common area of financial waste is utility and other recurring bills. A line by line audit of your statements can identify spending that provides little value. For example, maybe you can cancel the smartphone insurance through your carrier and save money by insuring your device through Square Trade. Perhaps you can eliminate the cable or home phone bills or reduce the number of streaming services.

Cable TV, gym membership, and other subscription services are great places you can often find meaningful savings each month.

Don’t Lose Touch of Your Money

One of the easiest ways to rack up huge credit card debt is to resort to the convenience of paying with plastic.  Before you know it, you swiped the card and probably didn’t even look at the register to see what the total purchase was, and if you did, you probably can’t remember the amount a few hours later.  This unconscious spending leads to a big bill at the end of the month, and big interest charges if you fail to pay off the full amount of the purchase each month.

Avoid unconscious spending and opt for paying with cash.  This small change in your behavior forces you to maintain a physical connection with your money until you voluntarily surrender it in exchange for the purchase of goods or services.  That physical connection to your money will force you to more thoroughly scrutinize how and where you surrender every dollar you earn.

Little Changes Make All the Difference

Just as small charges can add up to tens of thousands of dollars in debt, subtle, imperceptible changes in spending habits can have a large impact on the way you spend or save.

Eating out less, adjusting your food shopping habits, and paying attention to fees can also lower costs without compromising your lifestyle. When you know where your money goes with a budget and a system to track spending, you can turn your finances around.


  • Why is it so easy to get into debt with credit cards?

    Credit card companies use two criteria for account approval: stated income and credit score. Then companies charge double-digit interest rates, sometimes as high as 30%, but only require you to pay 2 or 3% of the outstanding balance to remain current on the account. The business model in the credit card industry relies on consumer overspending to increase profits.

  • Why is credit card debt considered bad debt?

    Good debt includes financing assets that increase income potential or build wealth. Real estate and student loans are common examples. Bad debt refers to financing things that depreciate, like consumer goods. Examples include credit card debt, and financing consumer goods or vehicles.

  • Why is it so hard to pay off credit card debt?

    The credit card industry charges high interest rates and only requires a minimum payment of 2 to 3% of the average monthly balance. The result is a minimum payment that barely covers the interest charges. If you only pay the minimum balance on a large credit card balance, you could be paying on the debt for over 30 years and paying 3X the original balance.