25% of Consumers Are Dangerously Misinformed About Credit Cards
One upside of having a credit card is that it gives you some flexibility in the face of unplanned expenses. It is never ideal to carry a credit card balance, but you may find yourself in a situation where you need money in a pinch and you don’t have an emergency fund to tap. If this happens, you can charge the expense to your credit card and pay it off as quickly as possible. You will have to pay interest, but if you only hang onto that balance for a short period of time, you won’t end up wasting too much money in the process.
Recent data from Stash Investments, however, highlights one major point of misunderstanding that could be causing countless Americans to effectively flush their money down the toilet. An estimated 25% of U.S. adults think it’s smart to maintain a credit card balance and only make the minimum payments due on their accounts. And that’s a costly habit that needs to be curbed immediately.
The problem with carrying a credit card balance
If you owe money on a credit card and make a point of coming up with your minimum payments in a timely fashion, your credit score won’t get dinged from a payment history standpoint. And since payment history is the single most important factor that goes into establishing a credit score, that’s key.
But that doesn’t mean carrying a balance is a good idea. Quite the contrary — when you only pay your minimum month after month, you continue to accrue interest on the sum you owe, and over time, you could throw quite a bit of money away.
Imagine you owe $3,000 on a credit card with an APR of 17%. Let’s also say that your minimum payment for that balance is $25. If you only make the minimum payment, it will take you 126 months to shed that debt fully, during which time you’ll end up accruing $2,241 in interest charges. That’s a lot of money to give to your credit card company.
A better bet? Work on paying down your credit card balance quickly so that you’re not stuck racking up so much interest. Of course, the ideal thing would be to not carry a balance at all, and instead pay your bills in full each month.
But if you already have a sizable balance and are therefore past that point, cut back on spending so that you can pay down your debt as fast as possible. Maybe even look at getting a second job to come up with that cash. You can also apply any future windfalls you receive to your existing debt, whether it’s a generous birthday gift that comes in cash form or a bonus for outstanding performance at work.
Remember, too, that it’s okay — smart, in fact — to charge expenses on a credit card regularly provided you can pay your bills by the time they come due. Doing so will actually help your credit score, because when you establish a pattern of paying bills in a timely fashion, that good behavior gets recorded as part of your payment history. It’s when you don’t pay your balance in full, or only pay the minimum, that you run into problems.
Carrying a credit card balance isn’t good for your credit score. If anything, it can actually hurt it, because the more of your available credit you use at once, the more it is likely to hit your score. Throw in the potential to lose a lot of money to interest, and it’s clear that if you’re carrying a balance, you should strive to make way more than your minimum payments from now on.
This content was produced by The Ascent, a personal finance brand by The Motley Fool
