In light of the current historically high interest rates, it's not advisable to accumulate additional credit card debt at this time.
The Federal Reserve is anticipated to raise interest rates once again before the year concludes, and the average credit card interest rate has already reached an all-time peak. According to WalletHub, the typical interest rate for existing accounts stands at 22.77%, the highest it has been in three decades.
Utilizing automated payment options can assist credit card holders in avoiding late payment penalties. Nevertheless, individuals who employ automated payment features often establish payments for amounts exceeding the minimum due, but they also tend to reduce their monthly balance by a smaller proportion compared to customers who make manual payments, as per a study from 2022.
Experts caution that cardholders who do not pay their statement balance in full each month will ultimately incur more interest charges.
"You have the option to configure it for a reduced monthly payment," suggested Sara Rathner, a credit cards specialist and NerdWallet writer. "If you still carry a balance, it will carry over as long as it remains unpaid." However, that unpaid balance will be subject to interest costs.
To steer clear of excessive interest and fees, experts advise configuring your credit card's automated payments to cover the complete statement balance. Even if your online account displays a "current" balance that encompasses recent charges, making full payment of the statement balance each month is the sole requirement to evade interest fees.
In the event that you cannot settle the entire statement balance, Nick Ewen, the Director of Content at The Points Guy, recommends making regular smaller payments to stay current and make gradual progress in reducing your overall balance. Failing to do so can result in substantial late fees, in addition to accumulating interest.
You typically have the flexibility to settle your statement or current balance at your convenience. "There's no penalty fee applied to your card when you clear your statement balance before the due date," Ewen emphasized.
Here are some recommended practices for cardholders to consider:
Align the due date with your payday:
Inquire with your lender about the possibility of adjusting your card's payment due date to a few days after your paycheck is deposited, as advised by Rathner. This approach allows you to have a clear understanding of the available funds in your checking account before an automated card payment is scheduled, minimizing the risk of overdrawing your account. To explore these options, access your credit card account online or reach out to a customer service representative.
Be cautious about penalty APRs:
Typically, zero percent annual percentage rate (APR) offers remain in effect for 12 to 18 months. Nevertheless, failing to meet the minimum payment requirement could lead the card issuer to withdraw the 0% APR offer and switch the cardholder to an APR of 29% or even higher, cautioned Ewen.
It's crucial to carefully examine the details in the terms and conditions and ensure that all payments are made to preserve the promotional rate. Furthermore, clearing the entire balance before the promotional period ends is essential. Otherwise, you'll start incurring interest charges at that juncture, he emphasized.
Explore the options of a balance transfer or product alteration:
If you find yourself burdened with credit card debt, contemplate the idea of a balance transfer, advised Ewen. Some credit cards provide a 0% APR for balance transfers, typically accompanied by a one-time fee, for instance, 3% to 5% or a nominal fee like $5, he explained. When you transfer a balance from one card to another with a 12-month 0% APR offer, you have a full year to settle that balance, provided it's paid off before the introductory special expires.
Furthermore, should the terms change on one of your current credit cards, most major credit card companies are open to offering a product change, as highlighted by Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California.
Instead of shutting down the impacted card, Sun suggested switching to another card from the same issuer that doesn't come with an annual fee. This approach is beneficial, especially if you possess a credit card with high annual fees but want to maintain a substantial overall credit limit.
"It doesn't necessitate a credit inquiry and trims down credit card costs," mentioned Sun, who is a member of CNBC's Advisor Council. Give your provider a call and inquire about the possibility of making a product change.
