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THE FINE PRINT

You paid down your credit card balances during the pandemic. Now what?

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One outcome of the pandemic that has surprised some is the sharp reduction in consumer credit card debt.

When the coronavirus crisis struck, many major lenders (mostly large banks) expected credit card debt to surge, with businesses shuttering and people losing their jobs. Consumers, they reasoned, would turn to plastic to make ends meet.

But extended unemployment payments — and government stimulus checks — meant that fewer turned to credit cards to bail themselves out.

Meanwhile, many people working from home ended up spending a lot less on clothing, travel, and entertainment, using that surplus money to pay down credit card balances.

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Overall, consumers shed almost $160 billion in credit card debt during the pandemic, about a 15 percent reduction, compared to the beginning of 2020.

Will that continue?

I hope so. Using a credit card has a lot of pluses: a month’s delay between when you purchase something and when you pay for it; less need to carry cash; a tidy record of your spending; rewards points; and, if an item you bought turns out to be defective, a way to get a refund.

What’s not to love about credit cards?

Shockingly high costs, for one, if you carry a balance.

Here are some things to think about as you contemplate a post-pandemic relationship with your credit cards:

Q. I paid off some credit card balances over the last 15 months. Should I close accounts I don’t think I will use again, or does that hurt my credit score?

A. Yes, it probably hurts your credit score, at least a little. When you close a credit card it lowers your credit limit and raises your credit utilization rate. And a high credit utilization rate lowers your creditworthiness. A simple example: You have two credit cards, each with a $1,000 credit limit, and you currently owe $500. With both accounts open, your credit limit is $2,000 and your credit utilization (the amount of credit you have used up) is 25 percent. If you close one of the accounts, your credit limit becomes $1,000 and your credit utilization 50 percent. Still, credit utilization is only one of several factors considered, including payment history, length of credit history, and types of credit.

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Q. What’s the biggest downside to using a credit card?

A. Interest rates. The average is more than 18 percent. On an unpaid balance of $1,000, the monthly cost in interest is about $15.

But the average consumer balance is about $8,000, and on that amount of debt the interest is about $120 a month. That’s almost $1,500 a year. And what exactly are you paying for? Bank profits, really.

Even those with a near-perfect credit score typically get charged more than 15 percent in interest (and almost 25 percent on cash advances) on credit cards.

You can find plenty of websites offering comparisons of credit cards by typing “shopping for a low interest credit card” into your browser.

Q. But I thought interest rates are at historically low levels?

A. They are. The average interest rate on a 30-year, fixed mortgage is about 3 percent. At that rate, an unpaid balance of $8,000 would cost about $20 a month. Compare that to the $120 you would pay on the same balance at 18 percent interest.

Auto loans are also about 3 percent. Why the difference in rates? Credit card debt is “unsecured,” that is, the lender has nothing to seize if payments stop. By contrast, mortgages are secured by real estate (and seized in foreclosure proceedings) and auto loans are secured by the automobile (and seized by repossession).

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Some credit cards now charge as much as 36 percent in interest.

Q. Can’t the state limit interest rates?

A. Yes, Massachusetts law generally limits credit card annual interest rates to 18 percent, but that applies only to credit cards issued by banks within the state. If you have a credit card with a national bank located in a different state, where higher interest rates are allowed, you may be charged the higher rate. Make sure you know where the bank that issued your credit card is located.

Q. What happens if I pay only the “minimum payment” due?

A. At first glance, it may seem like credit card companies are doing us a favor by setting very low minimum payments. But doing so builds up consumer balances to the advantage of the banks.

Most require a fixed amount — often $25 — or a percentage of the balance (some as low as 2 percent), whichever’s greater. Making these small payments on time will avoid late fees, which range as high as $40, but you won’t make any real progress paying down your balance because a chunk of that minimum payment goes toward paying interest.

Q. How long it will take to pay off a debt by paying the minimum amount?

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A. Federal law requires credit card companies to include a “minimum payment warning” on monthly statements. Look for it. My credit card company warned in a recent statement that it would take me more than 10 years of paying the minimum amount due of $25 a month to pay off a balance of $1,900, and that it would cost more than $1,600 in interest.

Q. Do debit cards incur interest?

A. No, debit cards are like paying cash: Payment is immediately deducted from your checking account. You get the ease of buying without cash, but without interest costs. One disadvantage is you may not have the right to dispute problem purchases.

Q. How do I lower my interest rate on a credit card?

A. You can negotiate with your card company by telling them you are prepared to transfer your balance to a competitor with a lower rate. Card companies often offer zero-interest balance transfers — some for as long as 18 months — which allow you to pay off a balance interest-free.

Q. Sounds good. Any drawbacks?

A. Yes, lower rates, known as “teasers,” last a limited time. When the teaser period expires, a higher interest rate is charged on any remaining balance. So it’s a good idea to calculate how much you need to pay each month to get rid of the balance before the zero-interest rate expires. Also, card companies typically charge a “transfer fee” of 3 to 5 percent of the balance transferred.

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Q. How can I guard against fraudulent use of my credit card?

A. Some companies allow cardholders to opt for real-time alerts when the card is used. If you get word of a purchase you didn’t make, you can quickly cancel the card.



Got a problem? Send your consumer issue to sean.murphy@globe.com. Follow him on Twitter @spmurphyboston.