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Sometimes, it’s necessary to carry a balance on your credit card to cope financially when life throws unexpected things your way or you have to make a large purchase. Of course, being able to carry a balance is a convenient credit card feature that could help you pay off such purchases in the long term. But the downside is you’ll pay interest and fees, and, in some cases, it may affect your other loan applications.
Say you buy a new TV for $1,000. Your due date is often up to 25 days after the close of each billing cycle. If you pay your entire balance during this time, you won’t pay interest on your purchase. But if you don’t pay the entire balance, you must pay at least 3%, or $30, in this case, to avoid paying fees.
At first glance, paying off your new TV in smaller increments for a longer period of time could lower the burden on your wallet. However, this feature doesn’t come for free. For example:
Interest is charged for any balance owing on a credit card at the end of the statement period. The rate of interest you pay depends on the type of balance, with four main categories:
Every time you fail to make the minimum payment by the due date, you’ll pay up to $48 depending on your card. Cards issued by credit unions typically have a $15 late payment fee. This could be an option if you’re often late on your payments.
Lenders assess applications for new credit based on factors including your income, current debt and credit history. This means when you apply for any new form of credit, any unpaid balances could influence the lender’s final decision. Also, any balance you carry increases your utilization rate. If it’s higher than 30% it may significantly impact your other loan applications.
Credit utilization above 30% directly affects your credit score in a negative way. That’s because it leaves the impression that you can’t properly manage your debt.
Another way carrying your balance could affect your credit score is if you miss the minimum payment or default on your account. In this case, this will significantly damage your credit score.
If you find that you’re struggling to make your credit card payment by the due date, stay calm. These steps will help you deal with it.
Another important thing to remember is to regularly check your credit card statements so that you know how much you owe. The sooner you can deal with this debt, the less negative impact it will have on your finances.
Here are a few ways you can manage your credit card balance:
If you are going to carry a balance, consider a card with low interest. Note that purchase and balance transfer APRs can vary widely and can be as low as 9% or as high as 28% variable.
While it’s easy to carry a credit card balance, it will have a serious impact on your account. Being aware of these factors and the ongoing implications of credit card debt will help you make informed decisions about how you manage your balance so that your card works for you.
A low interest rate credit card can help you save money in the long run, but be sure to compare your options before applying for one.
Image: Getty Images
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