One of the most important practices we preach when it comes to credit cards is paying the balances off each month. This is because credit cards charge among the highest interest rates in the debt markets, outside of payday loans.
Your credit score could suffer as well if you carry a balance. Even if you're paying the monthly minimum on time, your credit utilization -- the ratio of debt to credit limit -- will increase as you rack up more debt. Credit utilization accounts for about 30% of your credit score, and people with the best credit scores typically stay below 20%.
But there is one time when it's OK to have credit card debt. In fact, I'm currently carrying a few thousand dollars of credit card debt right now. The secret is the credit card interest rate is about the same as my interest in The Real Housewives of Beverly Hills -- 0%.
Avoid paying interest on your credit card debt
Credit card companies aren't in the business of giving indefinite interest-free loans. While some credit card companies make money on each transaction consumers make with their cards, the real money is in fees and interest. Smart consumers avoid paying both and make credit cards work for them, not the other way around.
But in order to entice consumers to sign up for a new credit card, issuers offer 0% introductory interest rates on some cards. The rate could be good for new purchases, balance transfers, or both. The amount of time the intro rate lasts also varies by credit card, ranging anywhere from six to 21 months.
Still, there are some very important things to know before you apply for a 0% intro APR credit card. Be sure to know the exact terms and conditions of your credit card before applying to ensure it fits your needs.
Keep in mind consumers with bad credit may not qualify for a 0% interest credit card. If you're already deep in debt and you've been missing payments for months, you may have done too much damage to your credit score to qualify for the best 0% intro APR credit cards. Take some steps to reduce your debt and improve your credit score for the best chance at getting approved.
Best steps to take if you're already in credit card debt
The first and simplest step you can take if you already have credit card debt that's charging a high interest rate is to stop using it. Take it out of your wallet. Shred it to pieces if you need to. Just stop using it. This might be easier said than done, but the pain of not being able to pay with plastic is less than the pain of high interest credit card debt.
The next step is to call and ask for a credit limit increase. Increasing your available credit will help lower your credit utilization rate, which should help you increase your credit score. You might also look at taking other steps to increase your credit score if it's not where you need it to be.
After you've improved your credit score, you should apply for a 0% intro APR credit card with no balance-transfer fee. Transfer the balance to the new credit card, and pay it off before the introductory rate expires. You'll often get charged interest dating back to your original balance transfer if you don't pay off the entire balance on time, so make sure you budget accordingly.
Don't get into debt just because you can
Debt is a tool you can use to make the most of your money, and if you don't get charged interest, it can be very appealing to lean heavily on debt for a few months. But consumers shouldn't go into debt just because it doesn't cost them anything. They risk not being able to pay off the balance if they're not careful and turning good debt into bad debt.
Zero percent interest cards are best used when paying off existing debt from a balance transfer or when you need to finance an unexpected expense like a home repair. If you need a new roof, for example, and you can't quite afford it, but you know you could pay for it over the course of a few months with some changes to your budget, a 0% intro APR credit card is perfect. If you want to go on a shopping spree with your 0% intro APR card, you might want to rethink things.
If you have all the money you need for a big purchase, you may be better off signing up for a new credit card that earns rewards and has a big sign-up bonus. The sign-up bonus is usually worth a lot more than you could earn by storing that money in a high-interest savings account for a year or so. Just make sure you can pay off the balance at the end of the statement cycle, so you don't end up paying unnecessary interest on that debt.
Credit cards, when used responsibly, are a great tool for making the most of your finances. While you generally want to avoid credit card debt, the exception is when you don't have to pay any interest on it. Even then, you'll want to be careful how you use that debt, as being too frivolous with it could lead to a big problem down the line. Be sure to research credit cards and your credit score to make an informed decision about which credit products are right for you before taking on extra debt.
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