Missing payments
One in seven Americans (14%) say they’ve missed a payment in 2023, according to a survey of American credit card users by Clever Real Estate. If you’re late with a credit card payment, you could be slapped with a penalty charge, although new regulations from the Consumer Financial Protection Bureau (CFPB) have capped the penalty fee at $8 per incident (versus an industry average of $32). Still, those fees add up.
Plus, late payments can negatively impact your credit score, hurting your future chances of qualifying for a loan. And if you miss payments over a stretch of time, your account could be sent to a collection agency.
A higher balance also means you’re paying higher interest charges — and credit cards have notoriously high rates. They’re at an all-time high, according to the CFPB, with the average APR almost doubling from 12.9% in 2013 to 22.8% in 2023.
So, say you have an interest rate of 20% and a balance of $1,000 on your credit card. After 60 days, that’s $40 in interest. After a year, that’s $200.
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Maxing out your credit card
Another mistake made by more than half of Americans — 53%, according to the Clever survey — is maxing out their credit card at some point. That includes 29% who max it out every month.
Maxing out your credit card — especially on a monthly basis — can impact your credit utilization ratio, which can drag down your credit score. Your credit utilization ratio is how much credit you’re using versus your total available credit, and best practice is to keep this ratio below 30%.
Credit-scoring companies use that ratio to help determine your credit score (among other factors). A low credit score means you could have a harder time getting a loan, including a mortgage, but you could also end up paying a higher interest rate on any loans you do get.
Making only minimum payments
Maybe you made a payment, but it’s just the minimum amount due (which, for many credit card companies, is around 2%). The Clever survey found that about 28% of card users find it difficult to regularly make even the minimum payments on their credit cards.
If you’re only making minimum payments, you’re only paying interest — and not touching the principal. That means your debt will continue to grow and you’re not actually putting a dent in it.
“Since finance charges are typically part of the minimum amount due, this additional interest burden may push consumers into persistent debt, accruing more in interest and fees than they pay towards the principal each year — or even delinquency,” according to a CFPB blog.
Plus, if you fail to make minimum payments, your credit limit could be decreased or your interest rate could be increased.
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Read MoreHow to take control of credit card debt
Of course, the ideal is to pay off your credit card in full, and on time, each month. For many people, that’s easier said than done. The Clever survey found that almost half (48%) of credit card users depend on their cards for rent, food and utilities.
Start by creating a budget so you know how much money is coming in and how much is going out. If you can’t pay off your credit card in full, pay off as much as you can — and more than the minimum monthly payment (to reduce the principal). You may have to reduce your expenses or boost your income to make the numbers work.
The next step is to reduce your interest rate. You could call your credit card issuer and see if you can negotiate a lower rate, but you can also consider refinancing by transferring your balance to another card or loan with a lower APR.
One option is to get a personal loan from a bank, credit union or online lender. By paying off your credit card with the money you get, you’ll be left with a lower interest rate and a series of fixed payments that put a solid timeline on ending your debt.
Homeowners can also apply for a home equity line of credit (HELOC), which will give you more flexibility on repayment than an installment loan. Or you can look into a balance transfer credit card, which can boast an interest rate as low as 0% for a limited amount of time — but keep an eye out for transfer fees.
If all of this just seems impossible, you may want to consult a free credit counseling service to help you find a way out of credit card debt.
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