Carrying a balance has always been costly, but it’s particularly expensive now.
The average credit card interest rate in mid-December was 19.42%, the highest rate since 1992. As the Federal Reserve Board continues to raise short-term interest rates to throttle inflation, average rates could rise even higher, says Ted Rossman, credit card analyst for Bankrate.com, which tracks interest rates for consumer loans.
It is not unusual for consumers who are struggling to pay their bills to pay the minimum payment on their credit cards. But over time, paying the minimum will add thousands of dollars to the amount you owe.
The average amount owed by cardholders who are carrying a balance is $6,569, according to an analysis by LendingTree, an online loan marketplace. If you are carrying a balance of that amount, your interest rate is 18%, and you pay only the minimum of $165 each month, it will take you five years to retire the debt, and your total payments will top $10,000. (You can crunch your own numbers using Experian’s credit card payoff calculator.)
Over time, paying the minimum will add thousands of dollars to the amount you owe.
If you have good-to-excellent credit, one option is to apply for a balance-transfer card with a 0% introductory rate. Wells Fargo, Bank of America and Citibank are offering balance-transfer cards with a 0% rate for up to 21 months, Rossman says. Most charge a transfer fee of 3% to 5% of the balance.
Once the introductory period ends, the interest rate will rise to the card’s regular rate, which could be even higher than the rate 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 balance-transfer period to get an idea of how much you should try to pay down each month. Resist the temptation to add to your credit card debt, even if you get offers for 0% interest on new purchases, Rossman says.
If you’re a homeowner, another option is to use a home equity line of credit to pay off your credit cards. The average rate for a home equity line of credit is 7.3%, according to Bankrate.com, and you usually have up to 20 years to pay off the loan.
But before you borrow against your home, make sure you can afford to make the payments if the economy goes south, says credit expert Gerri Detweiler. “If you fall behind on payments, you’re putting your house at risk.”
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Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.
