Important terms that every U.S. consumer needs to know and learn
An increasing number of consumers have been making delinquent credit card payments 30 days late or more, according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit.
Given the pressure of inflation and rising interest rates over the past few months, it's unfortunately no surprise that there's been a rising rate of late credit card payments. A recent Clever Real Estate survey found that 3 in 5 Americans are in credit card debt, owing an average of $5,875. In addition, 23% say they go deeper into credit card debt every month and 14% say they’ve missed a payment in 2023.
With credit card debt developing into a serious financial problem for many U.S. consumers, it's important to know key terms when it comes to your Visa and Mastercard. Here are three terms to learn:
Annual percentage rate (APR)
The APR is the interest rate or cost you pay yearly to borrow money for purchases. The average APR on a credit card is more than 21%, according to Bankrate, and nearly 30% for retail store credit cards. A LendingTree survey of 100 cards found some retail cards can have interest rates as high as 35%.
0% APR card
0% APR cards means you’ll pay no interest for a certain period of time for the ability to borrow money to make purchases.
The best 0% APR cards will allow you to pay no interest for up to 21 months. Pay close attention to when that 0% interest period will end, because when it does, the rate will spike up to the national average — or higher — and as rates continue to rise.
It's also important to understand if there are any penalties for late credit card payments. Late payments are normally a violation of the introductory offer terms for 0% APR cards; and you may end up with a penalty APR that’s higher than the card’s standard variable APR.
"Buy now, pay later" (BNPL) plans
"Buy now, pay later" plans, or BNPL plans, are another popular way to finance consumer purchases. The most popular BNPL apps include Affirm, Apple Pay Later and Klarna.
Here’s how BNPL plans work: You purchase an item and pay for that item over time after an upfront initial payment. BNPL plans generally don’t charge interest, which makes them an attractive alternative to credit cards. But they may charge a fee, especially if you miss a payment.
Although BNPL plans typically don't charge interest, you only have that short window of time to pay it off as an installment loan. Credit cards, on the other hand, provide more flexibility on balance payments.
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