Carrying a balance has always been expensive, but especially now.
The average credit card interest rate in mid-December was 19.42%, the highest since 1992. Average interest rates could be even higher as the Federal Reserve continues to raise short-term interest rates to keep inflation in check, says credit card’s Ted Rothman.Analyst Bankrate.comtrack consumer loan interest rates.
It is not uncommon for consumers struggling to pay their bills to pay the bare minimum with their credit cards. But over time, paying the minimum will add thousands of dollars to what you owe.
According to analysis by LendingTree, an online loan marketplace, the average debt for a cardholder with a balance is $6,569. If you have that amount of money in the balance and the interest rate is 18% for him and you are only paying a minimum of $165 each month, it will take him 5 years to pay off the debt and the total payment will be over $10,000. (You can crunch your own numbers using: Experian’s Credit Card Payoff Calculator.)
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Over time, paying the minimum will add thousands of dollars to the amount you owe.
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If you have good to good credit, one option is to apply for a balance transfer card with a 0% introductory rate. Wells Fargo, Bank of America and Citibank offer direct debit cards with 0% interest for up to 21 months, Rothman said. In most cases, there is a transfer fee of 3% to 5% of the balance.
After the trial period ends, the interest rate increases to the card’s regular interest rate. This may be even higher than the interest you were paying before the balance transfer. Ideally, you should try to pay off most or all of your balance before that happens. Divide the amount you owe by the number of months in the transition period to figure out how much you need to repay each month. Resist the temptation to increase credit card debt, Rothman says, even if he’s offered 0% interest on new purchases.
Another option for homeowners is to make credit card payments using a home equity credit line. The average interest rate on a home equity loan is 7.3%, according to. Bankrate.comand it usually takes up to 20 years to pay off the loan.
But before you take out a mortgage, make sure you can afford to pay it off if the economy takes a turn for the worse, says credit expert Jerry Detwiler. “A late payment puts your home in jeopardy.”
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Sandra Block is senior editor of Kiplinger’s Personal Finance magazine. For more on this topic and similar money topics, visit her website at: kiplinger.com.
