Last week, I made the case for credit cards vs. debit cards.
There is one big caveat, which I gave towards the end of the post:
“You should only apply for and use credit cards if you do not have debt problems, only use cards to pay for the essentials, have good cash flow to pay your balances, and then responsibly pay your balance in full every month.”
Responsibly paying your balance in full every month, on time, is what I want to focus on today. Even if you have the cash flow to do it, logistically, it can be easy to forget about, particularly if you have a handful of cards. And there are some awful consequences.
For starters, if you don’t pay your balance in full, you will incur interest charges. The interest rates vary based on the card and your credit worthiness, but it’s not uncommon to see APR’s of 15%+. Nobody should pay that high of an interest rate – for anything.
If you don’t pay a due balance on time you will also incur a late fee. Most credit card providers will charge you the maximum allowed first late payment fee of $25 and then $35 for each subsequent late payment fee. On top of that, late fees have their own APR, which can be prime rate + 20% plus.
And last but not least, late payments could also put a damper on your credit score/report and credit worthiness. One of the largest contributing factors to your credit score is your payment history (28% of your VantageScore and 35% of your FICO score).
In over a decade of credit card use, I had one late fee for accidentally not paying. I did have this fee dropped by calling customer service and asking nicely. However, I wouldn’t recommend relying on a customer service rep to be in equally as good/generous of a mood as mine was that day.
Fortunately, you have options. The first and easiest solution is to sign up for is autopay, if your card provider offers it (most do). Autopay will automatically deduct your statement balance from your linked bank account a set number of days after the statement close date. As long as your bank account has sufficient funds, autopay should theoretically prevent you from ever having a late fee and/or interest charges associated with your credit card. This is the most foolproof method.
Personally, I prefer to take the the manual approach of reviewing and then paying for each credit card statement. I do this because it keeps me honest about my charges, it allows me to make sure I have sufficient funds before paying, and it gives me a chance to review to make sure there are no fraudulent or unwanted charges to my card, prior to the payment being made. All good things.
The manual payment route takes a bit of effort, and for those who have or want to venture down that path, here is my advice:
- If you have multiple credit cards, change your credit card due dates to the same day each month. This makes the errand easier to bear by combining multiple tasks at the same time. When you pay one, you know you should also pay the others at the same time.
- Put a repeating monthly reminder on your calendar.
- Document your payments. When you make a payment and get a payment confirmation (happens instantly with many providers) jot down that total paid for each card, each month. Only put the total in when paid. This allows you to double check that you’ve made your payments for that month. It also has the benefit of summing up what you’ve paid over the course of the year and from one year to the next. I use a simple Google Spreadsheet to do this.
What strategies have you used to avoid credit card late fees and interest charges?