Carrying a credit card balance month to month can cost you. The interest adds up over time, and any purchases you made with your card end up being way more expensive than what you paid for them.
Consider this hypothetical example. You buy a $2,000 flat-screen TV on a credit card with a 15% interest rate. If you make only the minimum monthly payment, it would take you more than 17 years to pay off the original debt. You would pay the credit card company more than $2,500 in interest—essentially doubling the cost of the TV. Yikes!
“The point isn’t that you shouldn’t have a credit card,” says Stefan Ross, director of credit and debit card product at Fidelity. “Credit is an important tool in your financial toolbox, but it isn’t a good idea to keep a large balance.”
Luckily, there are some ways to help pay off your debt. Here are four.
1. Look for a lower rate.
If you have only one account, try negotiating a lower rate with the credit card company. Another option is to see if you can transfer the balance to an account with a lower interest rate. Balance transfers typically have a fee of between 2% and 5% of the balance, so keep that in mind when considering a transfer. If you have several accounts with balances, you could use a balance transfer to consolidate all your balances into a single, low-interest-rate account. One large debt is easier to manage than several small ones. You’ll have fewer bills to pay each month and progress will be easier to track month to month.
When you consolidate or transfer, read the terms carefully. Sometimes you get an introductory rate, and when it expires, the new rate is much higher. And when the new rate kicks in, it is applied to the balance for the interest-free or lower-rate period as well. So delaying paying off the balance in full, even for a day, could mean an increased cost. In this case, you’ll need to make sure that your debt is paid off before the new rate kicks in. And if you open a new credit card, make sure you put the other one away, so you cannot run up a balance on it.
2. Pay more than the minimum.
One strategy may be to pay double the monthly minimum each month. If you have several cards with balances, concentrate on doing this on the higher-interest-rate cards first. Or, if you can, pay half of the balance each month, until it is paid off. Thanks to the Credit CARD Act of 2009, credit card statements now show cardholders how long it will take to pay down their balance if they make only the minimum payment—not to mention how much more it will cost.
3. Have money available for emergencies and unplanned expenses.
More than 63% of Americans couldn’t come up with $500 in cash in the event of an emergency, according to the National Bureau of Economic Research and Forbes.com.1 The half that can’t come up with the $2,000 often tap their credit cards and begin a new debt cycle or pile on to existing debt, digging a deeper hole. First, be prepared for an emergency, like a job loss, by having three to six months of your essential expenses in an emergency fund. Then, setting aside 5% of every paycheck in a short-term savings account to pay for expenses that you might not expect can help you avoid using a credit card. Make this savings automatic. Have it automatically taken out of your paycheck and deposited in a separate account just for short-term savings.
4. Hide your card.
It may not be easy to do, but if you are carrying a balance on a credit card, putting it out of reach will help you pay it down. Don’t cancel it; that can impact your credit score, and it makes sense to have a credit card available in case of an emergency. And don’t use it until the balance is fully paid. This way you aren’t adding to what you owe, and it can also help you feel like you’re making progress when you see the balance go down.
There’s another benefit, too. By not using your cards, you might find that you spend less. This seems intuitive. If you only have $50 cash in your wallet, you’re less likely to exceed that amount at dinner for fear of not having enough. But with a credit card and a high limit, there’s nothing stopping you from splurging on an extra glass of wine or dessert, exceeding your $50 “limit.”
Learn to use credit wisely
A credit card does have a place in your financial life. “Using credit cards in the right way can help you build your credit history, and get better loan terms,” says Stefan Ross. “That means avoiding charging more than you can pay off every month, keeping your total debt levels low, and making on-time payments.”
Start now. The longer you wait to tackle large credit card balances, the more you’ll pay in interest, so start now. Hide your cards, lower your rate, and send in your first payment to start down the path to being free of high-rate credit card debt.
- Read Viewpoints: 7 steps for using credit cards wisely.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917