Carrying a balance on a credit card for the first time



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For some people, having a credit card balance isn’t always a choice, it’s the only way to handle a financial emergency or cover expenses during a period of unemployment. Other people choose to occasionally hold their credit card balance to fund a large purchase, take advantage of a 0% annual interest rate offer, or temporarily cover an expense they plan to pay off more. late.

If this is the first time you’ve had a credit card balance, you might feel embarrassed or anxious, but having a credit card balance doesn’t mean you’re doing something wrong financially. As long as you can prevent your outstanding credit card balance from turning into unmanageable credit card debt, you’re good to go. Even if you end up with credit card debt, there are many credit card debt resources that can help you manage your outstanding balances and get you on the path to a debt-free life.

Let’s take a look at what happens when you keep a balance on your credit card, and how to pay off your credit card balance as quickly as possible.

What happens when you carry a balance on your credit card?

When you have a balance on your credit card, you are essentially borrowing money from your credit card issuer. You must make at least the minimum payment on your balance each month in order to stay in good standing with your creditors. You will also need to pay off your balance in full at some point, otherwise you run the risk of turning a short-term balance into long-term credit card debt.

How Does Credit Card Interest Work When You Carry a Balance? In most cases, your credit card issuer offers a grace period during which you can pay off your balance before it starts earning interest. This grace period is usually the same length as your credit card bill cycle, which means that if you pay off your balance in full each bill cycle, you can borrow money without having to pay any. interests. If you don’t pay off your balance in full before your grace period has expired, your credit card issuer will start charging interest not only on your current balance, but also on any new purchases you make on the credit card. menu.

If this is your first time carrying a credit card balance, expect to lose your grace period and start earning interest on both your current balance and new purchases. You should also keep an eye on your credit score, as it could drop a few points. However, you can recover your credit score and start recovering your grace period by paying off your balance in full.

Are there good reasons to keep a balance on your credit card?

Is having a balance on a credit card always a good thing? It depends. While long-term credit card debt is usually a bad idea, carrying the occasional balance on your credit card shouldn’t hurt your finances too much.

Yes, having a balance often means losing your credit card grace period and paying interest charges, and your credit score can drop a few points until your credit card balance is paid off. That said, choosing to temporarily keep a balance on a credit card can help you deal with some of life’s most common financial situations, whether you’re paying an emergency medical bill or covering the cost of your next few months. vacation.

If you plan ahead and choose the right credit card, you may not even have to pay interest on your credit card balance. Many credit cards come with 0% annual interest rate offers on new purchases, and the best 0% annual interest rate credit cards give you a year or more to pay off your purchases beforehand. that the usual interest rates come into effect. If you pay off your balance in full before the introductory 0% APR expires, you’ve essentially given yourself a zero-interest loan.

How much interest will you pay on your credit card balance?

If this is the first time you have a credit card balance, you probably want to know how much it will cost you in interest charges. It all depends on what kind of interest rate your credit card issuer offers you and how that interest is calculated.

When you carry a balance beyond your credit card grace period, your credit card issuer begins charging interest under the terms of your credit card agreement. If your credit card offers 0% APR on purchases for the first year, for example, you get 12 months of zero interest on balances associated with new purchases.

If you are not below an introductory 0% APR offer, it is likely that your credit card interest will be calculated to compound daily. Let’s say your credit card issuer charges you the average credit card interest rate. At the time of this writing, it is around 16% of the APR. Your daily interest rate can be calculated by dividing your annual percentage rate by 365. With an APR of 16%, this equates to about 0.04% interest per day.

So if you have a $ 1,000 balance on your credit card, you will be charged 0.04% interest on the first day your balance exceeds your credit card grace period, which is $ 40. cents. Since the interest is compounding, the next day’s interest will be 0.04% of $ 1,000.40, and so on.

However, don’t expect your credit card balance to increase by a few cents every day. Even though credit card interest is calculated daily, you won’t see the final statement until you receive your credit card statement. That’s why some people are surprised at how much interest can accumulate in a single billing cycle, and why it’s important to pay off your credit card balances as quickly as possible.

Does having a balance on your credit card affect your credit score?

Having a balance on a credit card can have a negative effect on your credit score. Why? Because 30% of your FICO credit score is based on how much you owe your creditors. This is often referred to as a credit utilization ratio, and it’s based on the amount of credit you are currently using versus the amount of credit you currently have.

This means that even a small balance on a credit card could temporarily lower your credit score. If you notice that your credit score has dropped a few points after posting a balance on a credit card, don’t worry, once you have paid off your credit card balance, your credit score should increase to new.

What’s the best way to pay off a credit card balance?

The best way to pay off a credit card balance is to make a credit card payment that completely wipes your balance. If you can’t pay off your balance all at once, consider making several small payments until your balance is cleared. If you have the kind of credit card balance that can’t be paid off in a few small payments, consider applying for a balance transfer credit card that offers an introductory 0% APR on transferred balances.

When it comes to credit card payments, faster is almost always better. You don’t have to wait until the due date of your next credit card payment to pay off your credit card balance. You can make a payment whenever you want, and you can even make multiple credit card payments in a single bill cycle. Since credit card interest accumulates daily, paying off your credit card balance a few days earlier could save you money in interest charges.

Many people who pay off or transfer an unpaid credit card balance don’t realize that they may still owe interest on that balance and that those unpaid interest charges will only show up on their next credit card statement. . So don’t assume that you can ignore your future credit card statements just because your current credit card balance is $ 0. Your next bill may include interest charges on the balance you just paid, so you’ll want to make sure you pay all of the interest on your credit card as well.

The bottom line

If this is the first time you have a credit card balance, you don’t need to be embarrassed or anxious – after all, many people have a credit card balance at some point in their lives. Just do your best to pay off your balance as quickly as possible. Remember, you don’t have to wait until your next credit card payment is due; you can make a payment at any time, and you can make multiple small payments in a single billing cycle. The faster you pay off your credit card balance, the less interest you will pay on your balance and the sooner you can reap the benefits of living without credit card debt.

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