Last week’s Mint.com Money Mistakes Poll is all wrapped up and the results are in. By and large the results were not troubling, except for the results for question number 10: Yes or no, “I regularly carry a credit card balance that I pay interest on each month.”
26% of Minters answered yes, that they did carry a credit card balance that resulted in them paying interest.
First off, I commend everyone who took the poll. These types of polls are time-consuming and invasive. I also commend those who answered honestly that they regularly carry a credit card balance.
I also fully realize that if you had a choice in the matter you, would not revolve a credit card balance from month-to-month but for whatever reason, you’re stuck doing so.
Rather than browbeat you and tell you how bad it is to carry a balance on a credit card, I’ll only explain the costs of doing so, just in case you aren’t aware of the impact.
Credit card debt is expensive to carry. In fact, unless you choose to use payday lenders, pawn lenders or title lenders, your credit card debt will likely be the most expensive debt you’ll ever have.
The exact average interest rate on a credit card eludes us but most sources have it hovering around 15%, and that’s on a general use credit card like a Visa or MasterCard.
The interest rates on subprime credit cards, those reserved for people who have poor credit, are well into the 20 percent range with some nearing 30 percent.
And, retail store credit cards will almost always hit you with a 24 to 26 percent annual percentage rate, even if you have good credit.
Point being, if you’re carrying plastic debt, then it’s probably costing you between 15 and 30 percent of your balance each year to do so.
What’s most troubling about these rates is that they’re guaranteed. You’ll always pay these rates as long as you have the debt, unless you move the debt to a no-interest credit card.
What’s not guaranteed are the rates you’ll earn on deposits and investments. I’m a little out of my depth here but it’s simple math.
Does anything in your “investments” or “retirement” column perform at a guaranteed 15 to 30 percent annually?
Point being, while you’re paying interest at those rates you’re not really building a nest egg, even though you may think you are.
Your Credit Scores Are Lower
When you carry a balance on your credit cards, it’s very likely that your credit scores are being damaged by your actions.
There are two credit scoring issues at play here. The first is the infamous debt-to-limit percentage, which I’ve written about several times here on the MintLife Blog.
That percentage, often called “Revolving Utilization”, is a key component in your credit score.
Generally speaking, the higher your balances relative to your credit limits (on plastic), the lower your scores are going to be.
The second factor that’s being impacted by carrying balances is another FICO score measurement that considers the number of accounts on your credit report that have a balance greater than zero dollars.
The more you have, the more likely your score is going to suffer.
The solution to these issues is clearly to pay off the debt and never revolve a balance again. The problem is, this is not as easy as it sounds.
The average balance on a credit card (when there is a balance) varies but the consensus seems to be that it’s around $7,000.
And, households that carry credit card debt are, on average, in roughly $15,000 of it.
The amounts aren’t chump change, so it’s hard to just cut a check and be done with it but if you can, then that’s really what you should do.
Stay tuned for more Money Mistakes poll results throughout the week.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.