Here’s What Happens When You Rack Up a $20,000 Credit Card Balance

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A large credit card balance could wreak serious havoc on your finances. Read on to learn more about the consequences. [[{“value”:”

It’s natural to turn to credit cards every so often for unplanned expenses or larger purchases you can’t quite cover on the spot. But relying on credit cards too often could lead to a situation where your debt has gotten out of hand.

That’s the situation a lot of consumers are in today. Recent data from Experian finds that Gen Xers owe more money on their credit cards than any other generation, with an average balance of $9,123.

But what if you owe more than twice that much money on your cards? What if you’re $20,000 in the hole? If that’s the boat you’re in, two pretty unfortunate things could happen.

1. You might lose a boatload of money to interest

Credit card companies don’t extend lines of credit out of the goodness of their hearts. They do it to make money by collecting interest. And if you owe $20,000 on your cards, you may end up paying a lot of it, especially if your debt drags on for many years.

In fact, let’s say your credit card has a 20% APR. Here’s the amount of interest your $20,000 balance might cost you, depending on the number of years it takes you to pay that debt off.

2. Your credit score might take a serious beating

Your credit score tells lenders how much risk they’re taking on by loaning you money. The higher your score, the easier it becomes to borrow, and the more favorable an interest rate you might snag when you sign a loan.

But a large credit card balance relative to your total spending limit across your cards could cause your credit score to plummet thanks to a higher credit utilization ratio — even if you’re making your minimum payments on time every month. And once your credit score drops, you might struggle to be approved for new loans or credit cards. If you do get approved, you risk getting stuck with higher interest rates that make your debt very expensive.

How to shed a $20,000 credit card balance

If you’re sitting on a $20,000 credit card balance, you may be eager to whittle it down to $0 as quickly as you can. That’s not likely to happen within weeks, or even months. But there’s one tactic you can employ that might help — rolling your debt into a personal loan.

The nice thing about personal loans is that they come with fixed interest rates, so your monthly payments are nice and predictable. And chances are, you’ll be able to lock in a much lower interest rate on a personal loan than what your credit cards are charging you.

If you’re able to roll your credit card debt into a $20,000 personal loan with an 8% interest rate, even if it takes you five years to pay it off, you’re looking at spending $4,332 on interest. That’s much less than the $11,793 you might pay if you carry a $20,000 balance for five years at a 20% APR.

You can also look to pay off your personal loan ahead of schedule to minimize the amount of interest you’re charged. But to pull that off, you may need to make big changes to your spending, like move to a less expensive home or get rid of a car and stick with public transportation for a few years.

You could also look to join the gig economy and use all of your extra earnings to pay down your debt. Just be sure to reserve some of your side hustle income for taxes, in case you don’t have them withheld from the start.

A $20,000 credit card balance could hurt your finances and cause you a lot of stress otherwise. Paying it off as quickly and efficiently as possible could do you a lot of good.

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