What to Expect When You're Expecting a Huge Credit Card Bill

By Dan Rafter. Last updated 27 April 2016. 0 comments

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You've been splurging the last few months — dining out, ordering online gifts, and booking a vacation you sorely need. And you put all of these purchases on your credit card.

You know you won't be able to pay off this debt within a few months, but you've justified it by reasoning you can pay it off very soon. But these purchases you've made — well they couldn't wait until you could actually afford them.

Maybe that's true. Maybe an unexpected but critical expense came up. Maybe everyone was booking flights for your family vacation and you had to commit. A little debt isn't going to kill your finances, right? Okay, so you'll just pay a little in interest.

Unfortunately, it's likely to be more than a little interest — and there's a lot more at stake than paying more interest.

Consider these financial challenges that you might not be expecting with a big credit card bill. You'll struggle with each of them until you eliminate your credit card debt.

Tons of Interest

The biggest problem with credit cards? All that interest you'll pay if you carry a balance each month. Say you owe $5,000 on your credit card at an interest rate of 16.5%. If you make a payment of $100 every month on that debt, it will take you 86 months, or more than seven years, to pay off that $5,000.

Why so long? Because of interest. By paying just $100 a month, you'll pay an additional $3,517 in interest alone before you erase your debt. This means you'll pay a total of more than $8,500 to pay off $5,000 worth of charges.

The lesson here is simple: The interest you'll pay is never worth the instant gratification of getting something when you can't afford it. It'll just start a never-ending cycle of not being able to afford the next thing you want because you're still trying to pay off that other thing you bought. If you must carry a balance for a period of time, pay as much as you can (not just the minimum) to avoid more interest piling on (interest gets calculated based on your daily balance so get it down as much as possible, as quickly as possible).

Even better — if you know you'll have to make a large purchase but can't pay it off right away, get a credit card with a 0% promotional APR for purchases. That will buy you some time, but you still have to pay it off before the promotional period ends. If you already have a balance you're paying interest on, try a credit card with a 0% APR for balance transfers.

No More Grace Period

Most credit cards offer a grace period to pay off your purchases before they charge interest. Pay off your balance during this grace period and you're golden — you've borrowed money for free, and perhaps even made a little if you used a cash back credit card. But when you leave a balance, you'll not only get hit with interest for those purchases, you lose your grace period on all future purchases. Meaning, the minute a charge gets through, interest can start accruing.

It'll take several billing cycles before your grace period is reinstated, so make sure you don't lose it in the first place.

A Lower Credit Score

If you have too much credit card debt, your credit score will suffer. That's because lenders consider you more of a risk to not pay back your debts when you are saddled with high amounts of credit card debt.

Something called your credit-utilization ratio is a key factor here. If you use too much of your available credit, your credit score will drop. For instance, if you have $20,000 worth of credit available to you and you owe a total of $17,000 on your credit card accounts, you have a credit utilization ratio that is far too high. A high ratio will drop your credit score.

You may not think much about your credit score until you need it. If you're hoping to buy a house, a car, or even a new job, your credit score may determine whether you get it or not.

(See also: 15 Surprising Ways a Bad Credit Score Can Hurt You)

No matter how much credit available you have, it's never a good idea to use it all up at any one time. Spread out your purchases and pay them down quickly.

A High Debt-to-Income Ratio

In addition to your credit score, lenders rely on your debt-to-income ratio. This ratio examines the relationship between your monthly debts and your gross monthly income. Lenders factor in your minimum required monthly credit card payments as part of your debt obligations. If these minimum payments are high, it could throw your debt-to-income ratio out of whack.

For instance, if you're applying for a mortgage loan, lenders want your monthly debts — including your estimated new mortgage payments — to equal no more than 43% of your gross monthly income. If your credit card payments push that ratio up past 43%, you might not qualify for that home loan.

Sky-High Interest Rates

With a large credit card debt and a low credit score, you can expect to pay higher interest rates on whatever loans — including auto and mortgage — for which you do qualify. Lenders charge higher rates to borrowers whom they deem higher risks. If your score is low — in part because of your huge credit card bill — get ready to be hit with interest rates higher than the market average.

That's too bad. Higher rates can make a significant difference in the amount you pay each month on loans. Say you take out a 30-year fixed-rate mortgage loan of $200,000 to finance a new home. If your interest rate is 3.95%, you'll pay about $949 each month, not counting whatever you'll need to pay for homeowners insurance and property taxes.

If you have a lower score your interest rate on the same loan could be more like 5.5%, which means you'll pay about $1,135 each month, again not including insurance and taxes.

That's a difference of $186 each month or $2,232 a year, simply because you owe too much on your credit cards.

More Hurdles to Renting

Even if you don't want to finance a home or a new car, high credit card debt can cause problems. Say you want to rent an apartment, your possible landlord will run your credit. If this search turns up high credit card debt, a landlord might hesitate before leasing you an apartment. The landlord might worry that with all the debt you're already facing, you won't be able to pay your monthly rent on time.

Contain the Pain

The first step is to curtail spending, but if the horse is out of the barn, here are a few steps to take to minimize the sting.

1. Stop Digging

Stop spending more than you can pay off every month! You can't begin to chip away at your debt balance if you keep adding to it.

2. Pay More Than the Minimum

Paying the minimum maximizes the amount you pay in interest over time. Whittle away at your debt overhang by paying more of it off, whenever you can. Changes to the law a few years ago mean that any extra you pay will go toward the highest interest debt on the account.

3. Make Multiple Payments Per Month

You can ease the burn of bill paying day by breaking up your payments as your paychecks or income arrive. Since your interest charge is based on your daily balance, cutting down your balance whenever you have funds available, rather than waiting until the bill is due, can help reduce the interest you pay, too.

Have you ever dreaded the arrival of a credit card bill? Did it change your behavior?

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