Wearing a balance has always been expensive, but it’s especially expensive now.
The average credit card interest rate in mid-December was 19.42%, the highest rate since 1992. As the Federal Reserve continues to raise short-term interest rates to stem l inflation, average rates could rise even more, says Ted Rossman, credit card analyst for Bankrate.comwhich tracks consumer loan interest rates.
It is not uncommon 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 have a balance is $6,569, according to analysis by LendingTree, an online lending marketplace. If you carry a balance of this amount, your interest rate is 18% and you only pay the minimum of $165 per month, it will take you five years to pay off the debt and your total payments will exceed $10,000. (You can calculate your own numbers using Experian’s Credit Card Payment 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 excellent credit, one option is to apply for a balance transfer card with a 0% introductory rate. Wells Fargo, Bank of America and Citibank offer balance transfer cards with a 0% rate for up to 21 months, Rossman says. Most charge transfer fees of 3% to 5% of the balance.
After the introductory period ends, the interest rate will increase to the card’s normal 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 this 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 repay each month. Resist the temptation to add to your credit card debt, even if you receive offers of 0% interest on new purchases, says Rossman.
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.comand you usually have up to 20 years to repay the loan.
But before borrowing against your home, make sure you can afford to make the payments if the economy turns south, says credit expert Gerri Detweiler. “If you fall behind on your payments, you are putting your home at risk.”
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Sandra Block is the editor of Kiplinger’s Personal Finance magazine. To learn more about this and similar money-related topics, visit Kiplinger.com.