Five Mistakes to Avoid When Paying off Credit Card Debt
Thursday, March 21, 2019 is National Credit Reduction Day
DULUTH, Minn. – According to a recent study credit card debt is at a record high.
Recent interest rate hikes mean we’re paying even more to carry that debt.
Thursday, March 21 is National Credit Card Reduction Day and Financial Advisor Barry Bigelow from Great Waters Financial offers five mistakes we should avoid making with credit cards.
Why do we need a day to remind us to reduce our credit card debt?
• Credit card debt is at an all-time high, and Americans paid more than $110 billion in credit card interest and fees last year, up 13% from 2017.
• As interest rates rise, the interest we pay on our credit card debt also rises. The average credit card APR (or annual percentage rate) increased a full percentage point last year and is now 16.86%.
• The Federal Reserve is expected to keep raising rates, which means you will likely be paying more in interest on your credit card debt.
Five credit card mistakes we need to avoid:
1. Making only the minimum payment
• It could take you months or even years to pay off your credit card if you pay only the minimum and leave the remaining balance as revolving debt.
• In the long run, the amount you need to pay off your credit card will increase exponentially because of interest.
• You can do the math for yourself with an interest rate calculator, like the one on my website.
• There you can see how long it will take to pay off your balance by making only the minimum payments and how much interest you’ll pay.
2. Missing payments
• Missing payments might seem like a small oversight at first, but the interest rate on the card—because of late payments—can grow dramatically and can ultimately hurt your credit score.
• Once you are overdue by more than 60 days, you will begin to experience even more negative effects. At this point, issuers will most likely report you to credit bureaus, flagging you for future loans.
3. Taking out cash advances
• When you use your credit card to take out a cash loan at an ATM, there is no grace period—meaning interest starts accumulating right away and it adds up quickly.
• That’s because the interest rate you pay on that cash advance is often much higher than the rate you pay on regular purchases.
• You may also face an ATM fee and a cash advance fee of 2-5% of the cash advance amount, so it’s costing you right off the bat.
4. Opening too many accounts
• The more credit cards you have, the more opportunities to get into debt.
• If you’re opening too many credit cards in a short amount of time, creditors may think you are in desperate need of cash, and they could be reluctant to loan you money.
• While there is no magic number, having 3-5 credit cards is manageable,
• Anything more than that can be hard to keep track of and makes it easier for you to dig yourself into a hole.
5. Running a high balance
• A high balance can negatively impact your credit score. Be aware of your credit utilization ratio.
• For example, if you have a balance of $3,000 and your credit limit is $6,000, your credit utilization ratio is 50%. It’s recommended you only use about 30% of the credit available to you.
• Baby boomers who are between 55 to 64 years old have an average balance of more than $8,000!
• Many of my clients are baby boomers who are in or near retirement. They need to be careful with how much they are spending on high-interest debt, as it could be taking away from their retirement savings.