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Feeling pressure from inflation and rising interest rates in recent months, a growing number of consumers are making credit card payments 30 days late or more, according to the Federal Bank’s latest quarterly report New York reserve on household debt and credit.
This growing rate of “credit card defaults” may tend to increase this holiday season. Typically, the end of the year is when more and more consumers start paying late.
It’s important to know what the words “credit card delinquency” mean because being late or behind on card payments can lower your credit score. This lower score can impact the interest rate you pay on mortgages, auto and private loans, the cost of insurance premiums – and even your ability to land a job.
With so many different ways to pay for your purchases with credit, “knowing your words” – especially when it comes to your personal finances – is more important than ever when buying gifts for family and friends this holiday season.
Here are three terms you should become familiar with:
If you’re paying for your holiday purchases with a credit card, you need to know the annual percentage rate, or APR, before you buy. The APR is the interest rate or cost you pay each year to borrow money for the purchase – and card rates are now near record highs. The average APR on a credit card is over 21%, according to Bankrateand almost 30% for retail store credit cards.
“Holiday shoppers need to know that the APR of the store credit card you might be tempted to purchase is going to be extremely high,” said Matt Schulz, LendingTree chief credit analyst. A LendingTree survey of 100 cards found that some retail cards can have interest rates as high as 35%.
The best way to borrow is to pay no interest – and you can do that if you can get a “0% APR” card. This means you won’t pay any interest for a certain period of time to be able to borrow money to make purchases.
The best 0% APR cards will let you pay no interest for up to 21 months, so you may not have to pay interest charges on purchases made now until August 2025. Be very Pay attention to the end of this 0% interest period, because when that happens, the rate will increase to the national average – or higher – and as rates continue to rise, that could mean you’ll have 25% interest charges or more.
Buy now, pay later or bundles are another popular way to finance holiday purchases that is now offered by most major retailers as well as app-based lenders. Affirm, Apple Pay Later and Klarna are among the Most popular BNPL apps.
In the financial industry, BNPL products are also called point-of-sale installment loans.
Here’s how the plans work: You can make purchases and pay for them over time after an initial upfront payment. BNPL plans generally don’t charge interest, making them an attractive alternative to credit cards. But they can charge fees of up to $15, especially if you miss a payment.
“The problem with these is that they can be very easy to get and that can lead to overspending,” warned Matt Schulz of LendingTree. “You only have a short amount of time to pay it back as an installment loan, as opposed to a credit card where you have a little more flexibility on the actual payments you make.”
— Stéphanie Dhue contributed to this article