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Credit Card Payments and Interest Rates

Credit Card Guilliotine.

Credit cards have become very popular for their convenience in the past decade. It is not uncommon for people to have two, three, or more at their disposal. However, if you're not careful, you can get yourself into a financial hole that is very hard to get out of. This can come from overspending, or from having multiple users with the same line of credit. It gets harder and harder to manage your debt the higher the balance goes. This article will talk about how much debt Americas have from credit cards. We'll also talk about interest rates, how your credit score affects them, and why you should make more than the minimum payments. Finally, we'll talk about rolling your credit card debt into a loan, and some tips and strategies to pay off your balance quicker.

How Much Credit Card Debt do Average Americans Have?

The average amount of debt that an American household has been steadily increasing in the past ten years. As of 2017, the average American household had more than $16,000 in credit card debt. Credit card interest rates play a huge role in this debt, with the average American household paying over $1,200 per year in interest rates alone.

Typical Debt Balances in an Average American Household

Debt Type Total Debt Owed by Household Total Debt Outstanding
Auto Loans $29,058 $1.17 Trillion
Credit Cards $16,425 $764 Billion
Mortgages $180,018 $8.63 Trillion
Student Loans $50,868 $1.34 Trillion
Total Debt $135,924 $12.73 Trillion

Total household debt outstanding as of 2017 Q1, United States Federal Reserve Center for Microeconomic Data.

Why is There so Much Credit Card Debt?

Credit card debt has been steadily climbing for over the past ten years. This is partly because even though the average household is making over 26% more, inflation on things like medical costs, food, and everyday items has been growing faster, at roughly 29%. This makes people spend more to keep up with the cost of daily life, and they go further into debt.

Average Income Versus the Cost of Living From 2003 to 2016

Since 2003 cost of living has accelerated faster than average incomes have. Since 2012 wages have started to close the gap, but the recession pushed down wages significantly.

Year Average Income Change Cost of Living Change
2004 2.35% 2.54%
2005 6.94% 7.4%
2006 11.27% 9.56%
2007 15.96% 12.67%
2008 16.12% 18.25%
2009 14.91% 16.62%
2010 13.75% 17.92%
2011 15.55% 22.42%
2012 17.77% 24.79%
2013 23.7% 26.22%
2014 23.87% 28.31%
2015 26.04% 28.3%
2016 27.83% 30.2%

How Can You Reduce This Gap?

There are a few things you can do to reduce the gap between your cost of living and your income. You can start by cutting out expenses. If you have a large cable package and you only watch a few channels, try a streaming service like Netflix. This will only cost you $10 a month, instead of the $80 or $150 cable bill. You can also look into things like reducing your data bill, or changing cell phone plans to a pay-as-you-go plan. Getting a second job is also a viable option to close this gap. Paying off high-interest debts & carrying no credit card balance can help save thousands of dollars a year in needless cost.

What is the Typical Interest Rate on Credit Cards?

Depending on the card type and your credit, the Annual Purchase Rate (APR) on a credit card can vary widely. It is also worth noting that most credit cards offer introductory rates of 0% APR for the first 12 or 18 months when you open the card, then it resumes the normal interest rate. Rewards credit cards are usually only offered to people with excellent credit and up, and this will help to lower the interest rates.

Average APR by Credit Card Type

Card Type Low Interest Rate High Interest Rate Overall Interest Rate
Business Cards 13.12% 19.78% 15.37%
Cash Back Cards 13.24% 22.99% 20.90%
Student Cards 13.99% 22.62% 20.90%
Travel Rewards Cards 15.62% 19.24% 15.99%
Airline Rewards Cards 14.62% 21.99% 15.99%
Hotel Rewards Cards 15.24% 21.99% 16.12%

With these interest rates, the low end of the spectrum is reserved for someone with excellent or average credit. The higher interest level end of the spectrum is for people with a poor to fair credit score. If you're not sure where you fall on the spectrum, you can pull your credit report for free once a year by clicking here. If you currently know your credit score, you still have to know what credit card companies consider poor, fair, average, and excellent credit. If you know this, you won't be surprised by the interest rate that comes with the card. Lenders may even reduce your interest rate if you have a higher credit score.

Credit Score Ranges

Rating Score Range
Bad 550 and Lower
Poor 551 to 649
Fair 650 to 699
Average 700 to 749
Excellent 750 and Up

How Does Credit Card Interest Compare to Interest Rates on Other Debt?

No matter what type of debt you have or you're thinking of applying for; it will go largely on your credit rating. The lower your credit score is, the higher the risk of you being denied a new line of credit is, and the higher the interest rates will be. The lenders do this because you're a higher risk client who is less likely to pay back any money you spend out of a line of credit. They are a business, and they're trying to protect themselves from losing money.

Average Interest Rates on Different Types of Debt

Debt Type Low Interest Rate Median Interest Rate High Interest Rate
Credit Cards 9.99% 13.99% 22.99%
Mortgage 2.98% 3.89% 5.02%
Personal Loan 10.94% 14.56% 28.64%
Small Business Loan 6% 9.5% 13%

Why Does Only Making Minimum Credit Card Payments Hurt You?

If you spend a large portion of your available credit card balance and only make the minimum payments, this can hurt you financially.

  • High Interest Amounts. Your interest rate will add on to your balance each month you don't zero out your card. If you make larger payments, you'll pay less interest overall and pay you card's balance off sooner. Let's say you have a 10,000 balance with a 19.9% interest rate. Your minimum payment is 3% of your $10,000 balance, so it's right around $300. If you only pay the minimum payment, it'll take your 15 years to pay it off completely, and it'll cost you $21,080. This minimum payment will also decrease as your overall balance decreases, and this will make it take even longer to pay off. However, if you chose to pay a $500 payment each month, this would shorten both the time it takes to pay off the debt and the overall amount you end up paying. You would pay a total of $12,500, and you would pay it off in two years time. You will save 13 years of payments and around $9,000.
  • Longer Time to Become Debt-Free. If you only pay your minimum payment each month and stop using the card altogether, it will take longer to pay off your existing balance because of your interest rates. Say you have $10,000 in debt and you only pay the minimum payment of $300 each month, and your card has an 18% interest rate. You will take approximately 47 months to pay it off, and this is assuming that you don't miss a payment or use the card until it's paid off.
  • Lower Your Credit Score.Just over 30% of your credit score is based on your credit utilization ratio and is is the amount of credit you have available compared to the amount you spent. If it's above 30%, this will begin to hurt your credit score. For example, if you have a $10,000 credit line and you spend $3,500, this will start to impact your credit score negatively, and you could see it drop because this amounts to a 35% utilization.

Penalties by Credit Card

If you fall behind on your credit card payments, or if you simply forget to make a payment. Your card issuer can apply penalties for you is just one day late with your payments. These penalties will get added to your current balance, making it harder for you to pay off. Also, if you're over 30 days late with your payments, your issuer can raise your annual percentage rating, and this can make your card's balance skyrocket.

Penalty Interest Rates by Lender (APR)

Card Type Penalty Rate
American Express 27.24%
Barclaycard 27.24%
Capital One 29.4%
Chase Card 29.99%
Citi Card 29.99%

When Does it Make Sense to Roll Your Credit Card Debt Into a Loan?

If you have a lot of credit card debt and you're feeling overwhelmed, it may be best to consolidate all of your credit card debt into a loan. This is the easier option when it comes to consolidating, and it typically offers a lower interest rate than you're paying with your credit cards.

  • Interest Rates. If the loan you're considering offers you a lower interest rate than your credit cards, it makes sense to consolidate your credit cards. You'll end up paying less in interest, and this will save you money in the long run.
  • Multiple Payments. If you're making multiple credit card payments each month and you're worried about missing one, consolidation could be a viable option for you to look into. It'll streamline each of your payments into one monthly payment.
  • Pay Off Your Debt Quicker. Since the personal loan has a lower interest rate, more of your payment will go to paying the balance off. This means that you'll be able to get out of debt quicker and pay less over the life of your loan.
  • Utilization Ratio. Multiple credit cards with high balances can hurt your credit utilization ratio. By combining all of your debt into a loan and paying off your credit card balances, your credit utilization will go down. This will make your credit score rise as you fall below the 30% credit utilization mark.

Common Strategies and Tips to Pay Off Your Debt Quicker

If you're trying to get out of debt quicker and pay less over time, there are several things you can do to expedite this process. You might even learn some valuable financial strategies that you can take away from this process and apply to your everyday financial knowledge. This will make you less likely to end up in the exact same spot once you get out.

Cut Out Expenses

Look at your monthly budget and see what is considered a 'luxury' item. Things like a cable package, data plan, the internet, or expensive cell phone plan can all be cut back. Also, watch how often you go out to eat or order a cup of coffee. Even cutting out a $3 a daily cup of coffee can save you $1,095 per year. All of this extra money could go to paying down your existing balances.

Make Multiple Payments

You are allowed to make more than one payment each month on your credit card balances. If you can afford it, make two payments a month. This will double the amount you're paying, and it will help you pay down the balance quicker. You'll get out of debt years quicker, and you won't have to worry about missing a payment.

Stop Using Your Cards Altogether

If you stop using your cards each month, you won't be adding additional debt onto your existing balance. This will enable you to pay off your existing balance quicker without adding to it. Pay with cash instead of your card because this will help you separate your needs from your wants and it can cut down your spending.


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