Credit cards can be a great financial tool when used responsibly. They allow you to make purchases with borrowed money, earn rewards, and build your credit score. They can be used around the world and offer a convenient and easy way to make purchases both in-person and online. Credit cards come with a range of features and benefits, including rewards programs, cashback, and purchase protection. However, it's important to use credit cards responsibly and pay off the balance in full each month to avoid accruing interest and falling into debt. If you don't pay off your credit card balance in full every month, it can have serious consequences for your finances. Here are a few ways that failing to pay off your credit card balance can cause problems:
How bad is it if I don’t pay off my credit card every month?
You may have to pay high-interest charges:
If you carry a balance on your credit card, you will be charged interest on the unpaid amount. These interest charges can quickly add up, making it difficult to pay off your balance. They can also cause you to owe a significant amount of interest dollars over time.
Credit card issuers charge high interest rates on balances that are not paid off in full each month. The interest rates are typically high, ranging from 19% to 29% per year in Canada. That means that if you have a balance of $1,000 on your credit card with an interest rate of 19%, you will be charged $190 in interest over the course of a year.
You will have to pay late payment fees:
If you don't make your minimum payment by the due date, you may be charged a late payment fee. This fee can range from $25 to $40, depending on your credit card issuer. Late fees can add up over time, making it even more difficult to pay off your balance. If you continue to miss payments, your credit card issuer may eventually send your account to a collection agency, which can have serious consequences for your credit score.
You may suffer damage to your credit score:
Late payments can negatively impact your credit score, making it more difficult to qualify for credit in the future. Your credit score is a number that reflects your trustworthiness as a borrower, and lenders use it to determine whether to approve you for credit and at what interest rate. Late payments or not paying off your credit card balance in full every month, can negatively impact your credit score. This is because carrying a high balance on your credit card can increase your credit utilization ratio, which is the amount of credit you're using compared to the amount of credit you have available. A high credit utilization ratio can signal to lenders that you're a riskier borrower, which can lower your credit score. This also makes it more difficult to get approved for credit and leads to higher interest rates on loans and credit cards.
You may have to deal with a decreased credit limit:
If you consistently fail to make your minimum payment, your credit card issuer may decrease your credit limit. This can make it more difficult to make purchases and can negatively impact your credit score.
You may have difficulty getting approved for credit:
If you have a history of late payments or carry a high balance on your credit card, lenders may be hesitant to approve you for credit in the future. This can make it difficult to get approved for loans, mortgages, or credit cards, which can impact your ability to make major purchases like a car or a home.
You may be charged increased interest rates:
If you consistently fail to pay off your credit card balance, your credit card issuer may increase your interest rate. This can make it even more difficult to pay off your balance and can lead to higher interest charges over time.
You may have to deal with collection calls and legal action:
If you fail to make your minimum payment for an extended period, your credit card issuer may send your account to a collection agency. This can result in collection calls, letters, and even legal action in some cases.
You may get stuck in a cycle of debt:
If you don't pay off your credit card balance in full every month, you can quickly find yourself in a cycle of debt. As interest charges and late fees add up, it can become increasingly difficult to pay off your balance. This can lead to a situation where you're only able to make the minimum payment each month, which means you'll be paying interest on your balance for a longer period. This can make it difficult to get out of debt and can have serious consequences for your financial well-being.
You may have to file for bankruptcy:
Failing to pay off your credit card balance can lead to significant financial problems, including bankruptcy. If you're unable to pay off your debts, bankruptcy may be the only option to get a fresh start.
It creates stress and anxiety:
Financial problems can cause stress and anxiety, which can impact your physical and mental health. Failing to pay off your credit card balance can lead to significant financial stress and anxiety, which can impact other areas of your life.
It may cause family conflict:
Financial problems can also cause conflict in relationships. Failing to pay off your credit card balance can lead to arguments and conflict with family members, which can negatively impact your relationships.
As you can see, not paying your credit card bills on time and in full can have multiple negative outcomes. If you're struggling to pay off your credit card balance every month, it can be challenging to know where to start. However, there are certain things you can do that will help you pay off your credit card bills each month. Let’s look at what these are.
Create a budget:
A budget is a crucial tool in managing your finances. It helps you identify where your money is going and how much you can afford to spend each month. By creating a budget, you can allocate funds to pay off your credit card balance and other bills.
Prioritize your payments:
Make your credit card payments a priority by paying them off before any other bills. This ensures that you don't forget to make your payment or spend the money allocated for your payment on other expenses.
Pay more than the minimum payment:
The minimum payment on your credit card only covers the interest and a small portion of the principal balance. By paying more than the minimum payment, you can reduce the principal balance and pay off your debt faster.
Consider a balance transfer:
A balance transfer allows you to transfer your credit card balance to another credit card with a lower interest rate. This will help you to pay lesser interest charges and pay off your debt faster.
Find ways to increase your income:
Consider finding ways to increase your income, such as taking on a part-time job or selling items you no longer need. The extra income can be used to pay off your credit card balance faster.
Cut back on unnecessary expenses:
Look for ways to cut back on unnecessary expenses, such as eating out less or cancelling subscription services you don't use. The money you save can be allocated towards paying off your credit card balance.
Use cash instead of credit:
If you have trouble sticking to your budget when using your credit card, consider using cash instead. This can help you avoid overspending and ensure you have enough money to pay off your credit card balance.
Negotiate a lower interest rate:
If you have a good credit score, you may be able to negotiate a lower interest rate with your credit card issuer. This in turn will reduce the total amount of interest you will have to pay and may mean that you can pay off your debt quicker.
Set up automatic payments:
Setting up automatic payments ensures that your credit card bill is paid on time every month. This can help you avoid late fees and ensure that your credit score isn't negatively impacted by missed payments.
Seek the help of a financial advisor:
If you're struggling to pay off your credit card balance, consider seeking the help of one of our Innovation financial advisors. They can help you create a personalized plan to pay off your debt and manage your finances more effectively.
While credit cards can be a helpful tool in building credit and managing finances, it's important to understand the potential risks and drawbacks associated with using credit cards. Carefully consider whether a credit card is the right financial tool for your needs. Use it responsibly and with a clear plan to pay off the balance each month. By doing so, you can enjoy the benefits of credit cards while avoiding the risks and drawbacks.