According to Federal Reserve data compiled by MagnifyMoney, Americans paid $104 billion in interest on credit card purchases over the twelve months ending March 2018. That's not outstanding credit card balances, which are near $1.04 trillion as of May 2018 – that's just interest charges on the outstanding amount.
How much did you contribute to that $104 billion total in interest payments? Your outstanding balance may not be $1.04 trillion, but every dollar of outstanding balance that you carry cuts into your overall purchasing power. You're slicing into the funds you need for future purposes.
If you do carry balances, you're likely to pay even more for the privilege. The Federal Reserve has been raising interest rates in small increments for years now to bring them back toward typical historical levels. Rates have increased twice in 2018 by 0.25% and are likely to increase two more times this year. Banks generally pass those rates on to you in the form of higher credit card rates.
The average annual percentage rate (APR) on credit cards is nearly 17%, according to Creditcards.com. If you have a poor credit score – or worse, missed a payment and are dealing with a penalty APR – you're paying significantly higher than average rates.
How do you limit the damage? Remember the old adage – if you're in a hole, stop digging. To stop carrying a balance and pay off an existing balance, you must keep expenses below your income. That requires a realistic budget.
Lay out all of your current monthly income and expenses over the course of a year, including those monthly ones that are easy to forget like property taxes and annual subscriptions. Select the expenses you can cut back on – such as eating out.
Data from the Department of Agriculture shows that Americans spent 5% of their disposable income on dining out in 2017. If you charge $25 less per month on dining out, that's $300 that you won't have to pay off (or pay interest on).
Once you've set a budget that produces a surplus, you can start paying down debt. If you have a large balance, you can consider shopping around for a balance transfer card that allows you to pay down the balance at 0% interest. Make sure you can save enough to avoid balances and pay down debt, because the post-introductory interest rate on such a card is likely to be high.
If you're going to carry a balance, shop around for a credit card with a better interest rate or good introductory offer. Check your credit report for any fraud or errors that may be holding your credit score down and keep your score high by staying well below your credit limits and making all payments on time. A high credit score allows you to get better interest rate offers, lowering your overall charges. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
We suggest resolving to never charge more than you can afford to pay off at the end of the month and make your full payments on time every month. That sounds easier than it really is – but if you establish that goal and create a savings mindset, you're more likely to keep extraneous purchases low and reduce your interest charges.
When making a significant purchase, ask this question – if I can't pay for this item within a month, can I really afford to purchase it? If the answer is yes, make a plan to pay it off promptly. If no, then let it go.
If you want more credit, check out our list of credit card offers.