Do you carry a balance on your credit card? Does the balance haunt you each month, running up interest charges, despite your best efforts to pay it off?
You're not alone. According to a new survey by Clever, a real estate data company, almost half (47%) of credit card users report carrying balances, and 56% of those cardholders have had debt for at least a year. Almost three-quarters (72%) of balance-carrying consumers had more than $1,000 in outstanding credit card debt.
Most balance holders aren't optimistic about paying off their debt anytime soon. Clever found that only 30% of Americans with credit card debt expect to completely pay it off this year. One in five Americans think it will take more than three years to pay off their credit card debt, 7% say it will take over five years to be free of credit card debt, and 8% have no idea when they'll pay off their debt – if ever.
Carrying a balance can be costly. The average annual percentage rate (APR) on credit cards is near 17.7%, a 0.5 percentage point increase over the last six months. Consumers with bad credit are paying an average APR over 25%.
To pay off a $1,000 balance in a year at 17.7%, you'll pay almost $100 in total interest – and that's if you don't charge anything else for the entire year. How likely is that?
Is there a silver lining? According to a 2018 report from CreditCards.com, 22% of people think carrying a balance builds your credit score. Sadly, they're wrong. Greg McBride, Senior VP and Chief Financial Analyst at Bankrate.com, explains, "You do not need to carry a balance – particularly at a high interest rate – in order to build your credit rating."
You do need to have running credit accounts to maintain a decent credit score. If you don't use credit at all, lenders have no way to assess the risk of loaning you money. However, the best way to rack up a higher credit score is to pay all your charges on time, every month, and in full. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Why do consumers carry balances? In some cases, it's because they have to. In other cases, consumers are simply spending more than they can afford to pay off each month. Just over half of respondents cited buying groceries as part of the reason for their credit card debt. Online and retail shopping were close behind at 48% and 43% respectively, while 44% called eating out one of their debt contributors.
"I think the worst misconception people have, particularly as it pertains to credit, is this idea that you have to owe money in order to build your credit rating. And that's not true. You can build your credit score very effectively by opening up credit cards and then paying the balance in full at the end of the month," says McBride.
More catastrophic expenses like car repairs (40%) and medical bills (30%) were significant debt contributors – but most reported debt came from controllable everyday expenses.
The Clever survey suggests that consumers could benefit from creating a new and more realistic budget, and then sticking to that budget. You can't pay down debt unless you have a monthly cash surplus to apply to that debt. Rebalance your budget until you spend less than you make – and that includes cash for contingencies like car repairs. If you didn't spend the contingency, great! You can pay down your debt even further.
Once you pay off the debt, keep your budget where it is. Put your surplus toward an emergency fund to reduce future debt. You'll use credit responsibly and build your credit score the right way - no balance carrying required.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.