Published in: Credit Cards | Sept. 15, 2019
Almost Half of All Americans Are Making This Mistake With Their Credit Cards
By: Christy Bieber
This credit card mistake can cost you a fortune. Are you one of the millions of Americans who’s making it?
Credit cards can help you out financially in a number of important ways. If you use your cards responsibly, you can build credit with them. You can also earn rewards or cash back points so that you benefit financially from your spending.
Unfortunately, many Americans aren’t using their cards very strategically or responsibly. In fact, close to half of all Americans make a serious and costly mistake with their credit cards, according to a recent survey by Charles Schwab.
What’s the mistake? Read on to find out.
Almost 50% of Americans are making this common credit card mistake
According to Schwab’s 2019 Modern Wealth Survey, carrying a credit card balance is the mistake that millions of Americans are making.
In fact, the survey revealed that 44% of all Americans typically carry a balance on their credit cards. This is significantly more than the 32% of Americans who indicate they never do.
Why is carrying a balance a big mistake?
Carrying a credit card balance on a regular basis is a big mistake for a lot of reasons. Here are just a few of them:
- Carrying a balance is expensive: Credit card interest rates routinely top 15% APR, so paying interest when you carry a balance can be very expensive. If you borrow $1,000 at 16% interest and make minimum payments of about 2% or $20, you would end up paying $994 -- almost the same again -- in interest and taking 126 months to repay the money you owe.
- Carrying a balance can hurt your credit: If your credit card balance is more than 30% of the credit available to you, this will hurt your credit utilization ratio. This is your ratio of credit used to credit available, and is the second most important component of your credit score. The lower your utilization ratio, the higher your score will be. Paying your card off obviously lowers your utilization ratio, helping to improve your credit.
- Carrying a balance can affect your debt-to-income ratio: When you apply for many loan types, lenders consider your debt-to-income ratio along with your credit score. Your debt-to-income ratio is a ratio of your monthly debt obligations relative to your income. The higher your credit card balance, the higher your payment will be and the bigger the impact it will have on your debt-to-income ratio. A ratio that is too high could lead to loan denials or higher interest rates.
- Carrying a balance comes with no benefits: Unfortunately, there are no advantages to carrying a credit card balance. Unlike mortgage and student loan interest, the interest you pay on credit cards is never tax deductible. And despite popular misconceptions, you do not need to carry a balance in order for your credit cards to help you build credit.
How to pay off your credit card balance
As you can see, there are lots of reasons not to carry a balance on your cards. But what if you already are?
In this situation, it's a smart move to pay off your debt ASAP so you can avoid paying the interest costs associated with credit card debt -- as well as its other downsides. You’ll want to make much more than the minimum payments, putting as much as you can toward your credit cards to pay them down quickly.
You can use the debt snowball method, which focuses on sending extra payments to your lowest-balance debt first, before moving on to the next smallest debt. Or the debt avalanche method, where you send extra payments to the card with the highest interest rate. As you pay off each debt, increase the payments you’re making to the next one you’re focusing on until all your debt is gone.
Transferring the balance of your high interest credit cards can also be a good idea. You could apply for a balance transfer credit card that offers a 0% promotional rate on transferred balances for a limited time. Move the balance of your existing cards over to the balance transfer card and try to pay them down before the 0% rate expires.
Or you could take out a personal loan to consolidate and refinance your credit card debt. Both of these options should ideally leave you with just one new loan to pay at an interest rate well below what your cards currently charge.
Don’t make this common credit card mistake
Now you know why carrying a credit card balance is a bad idea. And, if you’re one of the millions of Americans that routinely carries a balance, you also have some suggestions for getting rid of it. You can work on paying off your debt ASAP.
Going forward, you can commit to not charging more than you can pay off in full when your statement comes. That way you won’t make this common and costly mistake in the future.
Our #1 cash back pick has a surprise bonus
This may be the perfect cash back card! That's because it packs in $1,148 of value. Cardholders can earn up to 5% cash back, double rewards in the first year, and avoid interest well into 2020. With such a deep bench of perks you'll wonder how this card packs in a $0 annual fee. Best yet, you can apply and get a decision in two minutes. Learn more with our in-depth review.