The biggest mistake you can make with credit cards is carrying a balance every month, financial planners say.
Although credit cards are a convenient way to spend money, they have extremely high interest rates that now average 20.75%, according to the most recent data from Bankrate. This rate – called the annual percentage rate – is up from the average of 16.40% two years ago.
Compared to the single-digit interest rates you can get with other loans or mortgages, APRs on credit card debt are “exorbitant,” says Noah Damsky, a chartered financial analyst and principal at Marina Wealth Advisors. As such, carrying a balance can feel like “owing money to a loan shark,” he says.
To avoid wasting your money on interest, it’s best not to have an outstanding balance on your credit card, if you can.
Making only the minimum payments won’t help much either
With high-interest credit cards, it can be difficult to pay off your debts quickly, even if you only make the minimum payments each month. That’s because the typical minimum payment is mostly interest – up to 90% depending on how it’s calculated.
This is because minimum payments only extend the period of time you owe money while also increasing the amount of interest you pay. For example, it would take 277 months of minimum payments to pay off a $5,000 balance on a credit card with a 20% APR, according to CBS News. Over that time, you would pay $7,723 in interest on a $5,000 loan.
“Paying the minimum balance each month is not a good practice for the same reason that not paying the balance each month is the biggest mistake you can make with a credit card,” says planner Daniel Masuda Lehrman approved financier. In both cases, any unpaid balance will be added to interest, making it “exponentially difficult to repay,” he says.
Still, it’s better to make any payment than none at all. Missing your minimum payment during the monthly billing cycle can result in late fees of up to $40, a higher APR and even harm your credit score – what lenders use to determine your interest rate on loans or credit cards.
Try to pay off your credit card balance every month
It’s advisable to only use your credit card for expenses that you can afford to pay off relatively quickly, ideally within a month of purchase.
By doing so, you can largely avoid interest, as most credit cards offer a grace period during which interest will not accrue. A credit card’s grace period is between the end of the billing cycle and the payment due date shown on your monthly statement. Just note that a grace period probably won’t apply if you have an outstanding balance.
Some credit cards – usually subprime credit cards – do not offer grace periods. In this case, the best practice is to pay off your purchases as soon as possible, as credit card interest increases daily.
“I advise my clients to avoid using credit cards altogether if they can’t afford to pay the balance each month,” says Lehrman.
If you’ve had experience managing a scale before now, you’re not alone. The average outstanding amount in the United States the balance was $6,501 in 2023, an increase of $591 from the previous year, according to Experian data.
You want to minimize your exposure to unnecessary interest as best you can by tapping into your cash reserves, says Lehrman.
“I would recommend using a debit card or emergency fund to avoid carrying a balance on a credit card,” he says. Financial planners generally recommend keeping an emergency cash savings fund worth three to six months of your expenses.
If you already have credit card debt, financial planners generally recommend paying it off as quickly as possible. One way to do this is to transfer the balance to a credit card with an introductory 0% APR offer, as this will give you more breathing room to pay down your debt, says Lehrman.
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