60% of credit card accounts carry a balance. Here’s why that’s not necessarily a bad thing.

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It is generally a bad thing to have a balance on a credit card. The typical credit card charges an interest rate of around 15% per year on balances, some as high as 29% when penalty interest kicks in. Since short-term interest rates are still very high. close to zero, paying a double-digit interest rate is a big mistake.

But if you do, you are not alone. Through the recent Federal Reserve Payments Study, we learned that more than three in five credit card accounts had a balance carried forward at least once month-to-month in 2015, the most significant period. recent for which data is available.

Carrying a balance is not always a bad move

You can carry a balance on a credit card and use a credit card responsibly. These behaviors are not necessarily mutually exclusive.

In fact, many cardholders are now taking advantage of the intense competition in the credit card industry to score introductory APRs of 0% on their card. purchases and balance transfers for 18 months or more. Same cash back rewards cards, which are typically marketed to spendthrift people who don’t have balances, get into the 0% introductory APR game.

Image source: Getty Images.

It’s no surprise that many people carry a balance at 0% APR, if they could. Cardholders commonly use 0% introductory APR to divide large purchases into 18 months of bite-size monthly payments, ultimately paying no interest on the balance when it is paid off before the end of the promotional period.

Others use balance transfer promotions to put them on the fast track to final credit card debt repayment. In 2015, the latest year for which data is available, Americans opened more than 58 million credit cards, the highest since 2008. Many likely received 0% introductory APR as a benefit to the loan. opening the account.

But all the bills end up falling due

Of course, all credit cards that offer introductory rates end up falling back to regular credit cards with relatively high interest rates. But in the meantime, cardholders with existing credit card balances would be foolish not to lower their interest rate by transferring a balance to a card with 0% APR, even if the rate is only temporary.

Moving a $ 5,000 balance from a card with 15% APR to another card with 0% APR could save someone up to $ 615 in interest if the balance is paid off in 18 equal monthly payments. Likewise, put a purchase of $ 15,000 on a 0% APR credit card In order to keep your money in a high interest savings account for 18 months, you get hundreds of dollars in additional interest income on top of the $ 300 in rewards on a 2% cash back card.

Graph of percentage of people who have a credit card balance of $ 5,000 or more by credit score

Image source: author; Federal Reserve data.

Those with credit scores that hover around “first” are the most likely to have a balance of $ 5,000 or more, with 37% of people in this cohort having such a high balance. It is this group that is the target market for promotional 0% rates on balance transfers, as these cards are most often marketed to people who simply have “good” credit.

All of this to say that while there is never a good time to carry a balance at a regular credit card interest rate, given the proliferation of promotional interest rates, it certainly isn’t. the worst time to carry a balance on a credit card, Either.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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