Here’s what you need to know about how to pay down your credit cards. In today’s world having a credit card is a practical requirement. If you’re just starting, making regular, monthly payments on a credit card is a great way to build a credit history and establish a credit score.
Key Points :
- Your credit card issuer will tell you the minimum payment you need to make each month, as well as the due date for your payment.
- By paying the minimum on time, you will build a good credit history and increase your credit score.
- Making a minimum payment will reduce your interest on your credit card balance. If you pay your balance in full each month, you can avoid paying interest completely.
What is a credit card balance?
When you use a credit card to make a purchase, you owe the full amount you receive, usually referred to as your credit card balance. However, your balance is not just the sum of your purchases. This includes the interest due on your balance, as well as the fees and penalties charged by the card issuer. These may include annual fees, foreign transaction fees, cash advance fees, late payment penalties, and more, as we will explain later.
At the end of each monthly billing cycle, the card issuer will tell you how much you owe, the minimum payment you need, and when the payment is due. By paying a minimum, and making timely payments, you will be in a better position with your credit issuer. The rest of the money is then balanced into the next month’s balance and interest continues to accrue. That’s why, at the very least, it’s best to pay your balance every month.
Making a minimum payment and clearing your balance until the next month will not affect your credit score. However, this can be a problem if you are overcharging your entire credit line. Potential lenders consider the proportion of your credit use in deciding how risky it is to lend to you. Someone who normally uses their credit card to the maximum will be found to be less financially responsible than someone who has only a good portion of their available credit in reserve.
Your credit usage ratio is also an important factor in determining your credit score. A good ratio is usually 30% or less, so, if you have a credit card limit of 5,000, you should try to avoid exceeding your balance of $1,500. Should do.
Related: How To Get Rid Of Credit Card Debt
How Do Credit Card Interest Rates Work?
The interest your credit card issuers charge you is calculated as an annual percentage or APR. Since the APR is an annual percentage, it is divided by 12 and applies to your outstanding balance each month. For example, a credit card with a 20% APR will charge you about 1.66% interest each month on your outstanding balance.
(This example applies to a regular revolving credit card, which allows you to balance between billing periods. Another type of card often called a charge card, is very similar to a credit card. Looks and works but requires you to pay your balance is met each month).
Some cards have more than one APR, such as one for purchases and the other for cash promotions. This is all in terms of credit cards, which you should receive when you open your account. If you are purchasing a credit card, you can usually find the terms online.
Credit cards charge a lot of fees and penalties, many of which are avoided. But if you are not careful, they can represent a large part of your monthly payment.
Related: 4 Smart & Simple Credit Card Tips
Understanding (and avoiding) credit card fees
Credit cards usually come with a lot of prints for fees, fines, and other charges, which you can sometimes do by accident. Here are some key ones:
Late fees If you miss the due date for your minimum payment, you may face late fees. It can cost up to $27 for the first late payment. And up to about $40 for later payments. Besides your late payments will be reported to the Credit Bureau and will be reflected in your credit history, which can damage your credit score.
Excessive fees If you exceed the credit limit on your card. Your credit card issuer may charge you an exorbitant fee. This fee can range from 25 over to 35, depending on how often you exceed your limit. Note that some card issuers will easily reject any charges that exceed your credit limit when trying to purchase a card.
Annual fee. This is the annual fee you simply pay for the card. Many credit cards are available without an annual fee. Although they may have annual fee rewards programs that offer higher rewards for your purchases.
Cash Advance Fees Some credit cards allow you to take cash advances. This fee is usually calculated as a percentage of the amount you receive and can be expensive.
Refund Fees If your credit card payments bounce due to insufficient funds or any other reason, you will face this fee.
Use A Personal Loan To Pay Down Your Credit Cards
If you have a large amount of credit card debt across multiple credit cards getting a personal loan could help you pay down your debt. Payoff offers a loan that can pay off your credit cards with one simple monthly payment at a lower interest rate than most credit cards charge. Payoff can also help you increase your FICO credit score by up to 40 points.
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