Financial planners emphasize that carrying a balance on credit cards is one of the biggest mistakes you can make due to their high interest rates, averaging around 20.75% currently. Credit card debt with such high annual percentage rates can be likened to owing money to a loan shark, given the exorbitant rates. To avoid wasting money on interest, it is recommended not to carry a balance on your credit card if possible.
Making only the minimum payments on high-interest credit cards may not help much in paying off debt quickly. This is because the minimum payment is mainly interest, leading to prolonged debt and increased interest payments. For instance, it could take over 23 years to pay off a $5,000 balance with a 20% APR credit card through minimum payments, incurring $7,723 in interest over that time. Financial experts stress the importance of avoiding minimum payments to prevent compounding interest from making it increasingly difficult to pay off the debt.
As a best practice, it is advisable to only use a credit card for expenses that can be paid off relatively quickly, ideally within a month of the purchase. By doing so, you can avoid accruing interest on purchases with most credit cards offering a grace period between the billing cycle’s end and the payment due date. If you have an outstanding balance, the grace period may not apply, and you could be charged daily compounding interest, especially with subprime credit cards that do not offer grace periods. Financial planners recommend avoiding credit card use altogether if you cannot pay off the balance monthly.
While the average credit card debt in the U.S. has been increasing, financial experts suggest minimizing exposure to unnecessary interest by utilizing cash reserves or an emergency fund to avoid carrying a balance on a credit card. It is advisable to maintain an emergency fund equivalent to three to six months of expenses. If already in credit card debt, financial planners recommend paying it off as quickly as possible and possibly considering a balance transfer to a card with an introductory 0% APR offer for added breathing room to reduce debt. Financial literacy and responsible credit card use are crucial to avoid unnecessary interest and financial distress in the long run.
