Debt, Shmebt
Do you pay off your credit card bill every month? If not, how often do you pay off the full balance? If you haven't in the last year, you're with the majority of balance-carrying Americans.
According to a recent CreditCards.com poll, over half (56%) of Americans who have balances carry them for over a year – and half of that group isn't stressed about their debt. Approximately 23% of debtors have been in debt for at least three years, and 14% of debtors have been in debt for at least five years.
If you don't care about running debt, you should. You're not only paying extra interest charges, you're also leaving yourself no cushion for a true financial emergency.
The More You Have, The More You Spend
Debt isn't inherently bad – it allows you to handle large purchases without destroying cash flow. However, the convenience of credit cards can lead to excessive debt through overspending.
The CreditCards.com poll found that while lower-income cardholders are more likely to carry debt, higher-income cardholders tend to have longer-term debt. Only 7% of cardholders with incomes less than $30,000 have carried a balance for at least five years, compared to 17% of cardholders with incomes of $80,000 or above.
Why do higher-income cardholders have longer-term debt? It's probably because they have more cushion to handle payments. Lower-income cardholders are at greater risk of a debt spiral driven by ever-increasing interest charges.
Lower-income cardholders with balances are also likely to be closer to their credit limits and have lower credit scores with corresponding high credit card interest rates. The average annual percentage rate (APR) across all credit cards is just over 17.5%, but many cards have ranges (for example, 15.24% for low-risk customers and 25.24% for high-risk customers). You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
It's all about spending. If you regularly spend more than you make, your income level doesn't matter. You're at risk.
Use Credit Wisely, Not Often
It's easy to lose sight of how much you're paying for credit card convenience – and because of the compounding effect of interest and continuing charges, it's harder to pay off balances the longer you let them ride.
According to the payoff calculator at CreditCards.org, paying off a $3,000 balance in twelve months with no other charges at an average 17.5% APR will take twelve monthly payments of $274.33 and cost an extra $291.92 in interest.
How likely are you to make no other charges during that time?
Let's assume you hold charges to $500 per month during that period. To pay off your debt in twelve months, your monthly payment shoots to $822.98. Stretch repayment out to 24 months and your monthly payment only drops to $745.24. This assumes that you make all payments on time and don't incur fees or penalty APRs that further increase your debt.
If balances are rising, give your credit cards a rest and focus on paying down debt for a few months before interest gets out of control.
There's one sure way to keep credit card interest charges under control – don't spend more than you can afford to pay off each month. At the least, make unpaid balances a rare exception. Save your debt for more productive uses like mortgages – and keep those within your long-term budgetary means.
The Takeaway
Have you been carrying a credit card balance for months? Years? Decades? Maybe it's time to review your spending, especially if your balances are creeping higher each month. Using a higher percentage of your available credit harms your credit score and leaves you vulnerable to a catastrophic unplanned expense.
It's probably not realistic to cut expenses enough to pay off your debts in one month. Take the long view with your budget. Lay out expected expenses and income over the next two to three years, liberally sprinkling in unplanned expenses, and then trim other expenses to get to a monthly surplus to pay down existing balances.
With a regular monthly surplus and momentum going in the right direction, you can accelerate the process through a balance transfer credit card with a 0% introductory APR on transferred balances (and purchases, if you qualify for such a card). Before committing, be sure you can pay off the balance within the APR period (typically twelve to eighteen months) to avoid high post-introductory APRs.
With multiple debts, you should usually attack higher-interest debt first to save on interest charges. Trying to decide whether to pay extra on a credit card balance or make an extra mortgage payment against your principal? Use an online calculator to see the difference.
You shouldn't be stressed about debt – but your relaxed attitude should come from a solid plan to handle long-term debt, not from ignoring the problem.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.
