Cutting Credit Card Interest and Fees

In this topic, you'll learn:

• Best strategies to use to avoid unnecessary credit card expenses.
• How penalty fees can add up quickly.
• How to get help.

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Credit cards can be convenient, but that convenience may come at a cost. Unless your balance is paid in full each month, interest charges - often in the range of 20% APR or higher - are added daily. In addition, fees for late payments, cash advances, and even annual "membership" fees can also add up. But with the right approach, it's possible to minimize the potential costs of credit cards while enjoying all their benefits.

Reducing Interest and Fees

Here are some strategies to consider for reducing credit card interest and fees:

Set Up Automatic Payments

One of the easiest ways to avoid late payment fees and potential interest rate increases is to set up automatic monthly payments. These payments can be set to cover the total balance, a set amount, or the minimum payment due.

Ideally, you'll be able to pay the balance in full. If you're unsure that you can always cover the balance, even paying the minimum can be helpful - at least you'll never miss a payment. Just remember to pay as much as possible each month. A calendar reminder can be a helpful tool when using this approach. 

Avoid Impulse Purchases

Credit cards can make it easy to overspend on impulse purchases, leading to unexpected and potentially unmanageable debt. To avoid this pitfall, create a budget and stick to it. Before making a purchase, ask yourself if it's something you really need. 

If you're prone to impulse buying, consider leaving your credit cards at home when shopping and only carrying cash. Research has suggested that people may spend less when using cash rather than credit, though spending habits vary by individual.

Limit the Number of Cards Used

Consider using a single card for routine purchases. Using multiple credit cards can make it more challenging to track payments and balances, increasing the chances of missed payments and unplanned debt.

If you decide to use just one card, remember that canceling other cards may reduce your available credit and could affect your credit utilization ratio and length of credit history - factors that sometimes influence credit scores, though the impact varies depending on your overall credit profile. So it's possible to keep the other cards active without using them.

Use Cash Advances for Emergencies Only

With fees between 3% and 5% of the amount advanced, cash advances should be reserved for true emergencies. Unlike regular purchases, interest on cash advances usually starts immediately - there's no grace period. The interest rate charged for cash advances is often higher than that charged for regular purchases as well, making them an extremely expensive option for accessing cash. 

Monitor Your Statements

Regularly reviewing your credit card statements is crucial for catching unauthorized charges or billing errors. Most credit card companies allow you to set up alerts for unusual activity, which can help you detect potential fraud early on. If you notice any suspicious charge, contact your credit card issuer immediately to dispute it and potentially remove it from your account.

Already Carrying a Balance?

If you already carry a balance, you're not alone. According to some estimates, the average household with credit card debt owes around $11,500. Here are some approaches for minimizing interest charges while paying off your debt as quickly as possible.

Pay More Than the Minimum

Even if your statement says "no payment due," it's still a good idea to pay as much as possible toward the balance. As a starting point, paying more than the minimum - even twice the minimum if your budget allows - can help reduce interest charges and shorten your repayment timeline. For many people, credit card debt carries one of the highest interest rates of any debt they hold, which is why paying it down is often a high priority.

Consider Balance Transfers - Carefully

If you carry a high balance on a credit card with a high interest rate, a balance transfer at a promotional rate may be a valuable tool for saving on interest charges and repaying your debt faster. Whether it's taking advantage of an offer from an existing card or signing up for a new card, these offers typically include a 0% introductory APR for a set period, allowing you to accelerate your repayment timeline. 

But it's essential to have a repayment plan in place before signing up for a balance transfer. Otherwise, there's a risk of getting deeper into debt since there's extra "room" on the old card - leaving you in a worse situation than before. It's also important to understand that balance transfers typically involve a fee, often 3-5% of the amount transferred. Factor this cost into your decision to ensure the interest savings outweigh the fees.

Further, remember that applying for a new credit card and transferring a balance can temporarily lower your credit score. As we mentioned earlier when discussing limiting the number of cards used, you may want to consider keeping the old credit card account open after transferring the balance.

Debt Consolidation Loans

Many banks and credit unions offer personal loans that can be used to pay off credit card debt. These loans often carry a lower interest rate than credit cards and come with a fixed repayment timeline, which can simplify repayment. However, a longer loan term could mean paying more in total interest over time even at a lower rate - so it's worth comparing the total cost, not just the monthly payment.

Note that loan consolidation is generally best suited for those with average to above-average credit scores. In many cases, a higher credit score can help you qualify for a lower interest rate, though lenders also consider factors like income and existing debt. And remember, the potential risks we covered earlier for balance transfers may also apply to debt consolidation loans.

The Takeaway

Proactively managing your credit card accounts can help you maintain good credit and minimize the amount of interest paid on loan balances.

Penalty fees can add up quickly, and if late payments are reported to the credit bureaus, your credit report could be negatively affected - though the impact depends on factors like how late the payment is and your overall credit history.

If you're having trouble managing credit card debt, it's important to create a plan. Consider contacting your credit card company to explore options for reducing your payment while keeping your account current. Another option is to contact a reputable, non-profit credit counseling agency for independent advice on your specific situation.