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You Missed the Tax Deadline. Now What Should You Do?
You Missed the Tax Deadline. Now What Should You Do?
This story is part of Taxes 2022, CNET's coverage of the best tax software and everything else you need to get your return filed quickly, accurately and on-time.
Yesterday was the federal tax deadline for almost everyone in the US. (Massachusetts and Maine, you've still got today to finish.) If you didn't electronically file your tax return or have a paper return postmarked by midnight April 18, your taxes are now technically late.
There are plenty of reasons why people might not be able to finish and file their tax returns by the deadline -- missing tax info, medical emergencies, family troubles, unexpected travel… you know, life.
Yes, you should have filed a tax extension. But what to do now that your tax return is late? Whether you owe taxes or are expecting a tax refund, the answer is simple -- complete and file your 2021 tax return as soon as possible.
However, if you owe money, your situation becomes more urgent. The longer you wait to file your tax return and show the IRS you intend to pay what you owe, the more penalties and interest may pile up.
Read on to learn more about how to handle a late tax payment, including information on penalties, interest and payment plans. For more, find the best software for filing your tax return and learn how to track your refund to your bank account or mailbox after you do.
What if I'm late and I am expecting a tax refund for 2021?
If you're expecting money back from the IRS from your 2021 tax return, there are no penalties for filing late. In fact, you have three years to file your 2021 tax return before the IRS turns your tax refund over to the Treasury and your money is gone forever.
Your tax refund might be slightly delayed by filing late, but you should still expect to receive your money in four to six weeks.
You could be making good use of the money the IRS owes you, and the longer you wait to file your taxes, the more you lose out. Whether you use your tax refund to pay down a credit card debt, start an emergency fund, make investments or even just treat yourself to a nice dinner or vacation (depending on your refund amount), you want your money as soon as possible. Letting the IRS keep your tax refund longer only deprives you of possible interest and spending power.
What if I missed the deadline and I owe money on my taxes?
If you missed the tax deadline, didn't file an extension and you owe taxes, you need to hurry up and finish your return as soon as possible and send it in. Not filing taxes when you owe money to the IRS can incur both late filing penalties and late payment penalties.
What are the fees and penalties for filing taxes late?
There are two basic penalties that the IRS charges for filing taxes late when you owe money: a failure-to-file penalty and a failure-to-pay penalty. On top of that, you'll also pay interest on the amount you owe.
The failure-to-file penalty hurts the most. It's generally 5% of the amount you owe for each month or part of a month that your return is late, with a maximum penalty of 25%. If your return is more than 60 days late, the minimum penalty is $435 or the balance of your taxes due, if less than that.
The failure-to-pay penalty will also cost you money, but not nearly as much -- a big reason to file an extension on time even if you can't pay anything. This penalty is usually calculated at 0.5% of any taxes owed that aren't paid by the deadline. The IRS again charges the penalty for each month or part of a month that your payment is late, with a maximum 25% penalty total.
The IRS also charges interest on late taxes. Determined by adding 3% to the short-term federal interest rate, the IRS interest rate is currently 4%. That rate is adjusted quarterly, and interest is compounded daily.
Can I file an extension past the tax deadline?
Unfortunately, no. Tax extensions provide taxpayers six additional months to complete their tax returns, but they must be filed by the tax deadline. Taxpayers filing extensions must also include the estimated amount of money that they owe using IRS Form 1040-ES. Online tax software can also quickly calculate your estimated taxes.
If your deadline has passed, it's too late to file an extension.
What if I filed an extension on time?
Well done. You've got until Oct. 15, 2022, to file your tax return if you filed a tax extension by the April 18 deadline. As long as you paid an estimated amount that's close to what you owe, you won't be subject to fines or penalties if you file your return and pay any remaining tax liability by Oct. 15.
If you didn't pay enough money with your tax extension, you may be subject to the late payment penalty. The IRS expects your estimated payment to be at least 90% of your total tax liability. The agency may charge a 0.5% per month penalty on the amount of unpaid taxes if you paid less than that, so you should still complete your tax return and file it as soon as possible.
What if I can't afford to pay the taxes I owe?
Owing taxes that you don't have the money to pay can be incredibly stressful. However, you can take action now that will lighten both your financial and psychological burdens.
Consider an IRS payment plan. If you can pay off your tax debt within 180 days, the IRS will let you apply for a short-term payment plan that costs nothing, although you'll still accrue penalties and interest until your debt is paid off. It's easy to apply online or at a local IRS office.
If you need more than 180 days, you can apply for a long-term payment plan that costs $31 for automatic monthly bank payments via direct debit, or $130 for non-direct debit payments. Low-income taxpayers -- those with adjusted gross incomes at or below 250% of the federal poverty guidelines -- can waive the fee for the direct-debit installment plan or pay $43 for the non-direct debit plan.
You might consider other borrowing options outside of the IRS. If your tax liability isn't too high, you could use a credit card with a 0% intro APR to pay your taxes, assuming you can pay off that debt before the intro period expires. For larger tax debts, you could consider a debt-consolidation loan, though your rate will generally be higher than the 4% currently charged by the IRS.
When shopping for a mortgage, car loan or new credit card, you may be presented with an interest rate and an annual percentage rate -- each of which will show you the cost of the loan in a different way. Like with so many seemingly mundane financial details, the real-world implications of these two rates can add up to hundreds or thousands of dollars over time.
Knowing the crucial differences between the interest rate and APR will help you calculate your monthly payment, understand the total cost of a loan and, ultimately, identify the best deal. Here's why understanding how an APR impacts your loan -- especially in the context of a mortgage that can run into the hundreds of thousands of dollars -- is so important.
How interest rates work
An interest rate is the percentage of a loan you'll pay to the lender in exchange for borrowing money. With a mortgage, when you begin making monthly payments, interest is included in your payment. The actual rate you'll pay for a loan depends on a few factors.
Market trends
Interest rates are set by the Federal Open Market Committee (often referred to as "The Fed"), which is made up of representatives from the Federal Reserve. The Fed meets several times per year to discuss the state of the economy and adjust interest rates as needed. The Committee's job is to maintain healthy economic growth while keeping inflation at bay.
Currently, interest rates are at historic lows -- due in part to the coronavirus pandemic, but continuing a trend originating during the 2008 financial crisis. At the end of April 2021, the Fed decided to keep rates close to zero to keep financing as affordable as possible for businesses and individuals during this tough economic time.
Credit score
Your credit score also impacts the interest rate you're offered. Advertised interest rates are usually reserved for borrowers with excellent credit -- traditionally defined as a score of 760 or higher -- and may also include a rate discount for setting up automatic loan payments.
Individuals with a lower credit score (under 760) are usually offered higher interest rates to mitigate the lender's risk of losing money if the borrower defaults on their loan. A low credit score, a history of late payments or collection accounts can impact whether you're approved for a loan. And if you are approved, you'll likely be charged a higher interest rate than a borrower with good-to-excellent credit.
Most lenders recommend cleaning up your credit and finances before applying for a loan. Improving your credit score by paying down your debts and creating a history of on-time payments could save you thousands of dollars in interest on a mortgage.
For example, look at how a 0.5% difference in interest rates can change the total cost of a $300,000 loan over 30 years.
Interest paid at 3.00%: $155,332.36
Interest paid at 3.50%: $184,968.26
Though the numbers may be smaller for a credit card or car loan, modest differences in interest rates can add up over the years.
Other costs
In addition to your interest rate, there are other costs included in your home loan. The interest rate may be the most significant factor, but annual fees, closing costs and additional charges may add to the cost of borrowing money.
How annual percentage rate works
The annual percentage rate is typically higher than an interest rate because it includes all the costs of borrowing money. Some fees that may be incorporated into the APR are:
Points (one point is equal to 1% of the loan)
Loan-processing and administrative fees
Underwriting fee
Escrow or loan settlement fee
Private mortgage insurance (for mortgages)
Document-preparation fee
Annual fee (for credit cards)
While you may not always be able to negotiate your interest rate, you may be able to negotiate some of the fees included in your APR. The fewer the charges associated with the loan, the lower the APR.
Lenders must legally display their APR
The Truth in Lending Act was enacted in 1968 to make credit cards and loans more transparent, so buyers know what they're comparing -- and signing up for. One of the Act's requirements is that lenders must report APR, which reflects the extra costs of borrowing more accurately. You'll find the APR advertised alongside the interest rate. You can also find it in the Loan Estimate. The interest rate is usually shown on page one under "Loan Terms," and the APR usually appears on page three under the "Comparisons" section.
Fixed vs. variable APR
A fixed APR does not change. But a variable rate APR can fluctuate based on index rate changes, such as the Wall Street Journal's published prime rate. Some variable APRs -- penalty APRs -- can also change as a penalty if you make late payments.
How loan terms impact APR
The loan terms you choose will also impact the amount of interest and other fees you'll pay over the lifetime of your mortgage. You'll typically be able to make lower monthly payments and pay less monthly interest and fees with a 30-year mortgage than with a 15-year home loan. But, since you'll be making this payment for twice the amount of time, you'll ultimately pay more in interest. Generally, you'll pay less interest and fees overall with a shorter mortgage term.
Here's an example of how a loan term can impact your APR, based on a $250,000 home loan.
How loan term impacts APR
Option A: 3.25% interest rate, 15 years
Option B: 3.25% interest rate, 30 years
Option C: 3.75% interest rate, 15 years
Option D: 3.75% interest rate, 30 years
Cost of points and fees
$2,500
$2,500
$1,200
$1,200
APR
3.43%
3.35%
3.84%
3.80%
Monthly payment
$1,405.34
$870.41
$1,454.44
$926.23
Total interest paid
$52,960.76
$113,348.55
$61,800.08
$133,443.23
In this example, Option B has the lowest APR -- 3.350% for a 30-year loan term -- and may seem like the best choice at first glance. The monthly payment is the smallest at $870.41, over $500 cheaper per month than Option A. However, because Option B is spread out across 30 years, you'll pay more than double the amount of interest than you would with Option A.
Interest rate vs. APR: Which one should you use when mortgage shopping?
Bottom line: Interest rates are only part of the picture. When you're shopping for a mortgage or any other type of loan, comparing APR rates across lenders will give you the most accurate and complete view of your costs. A lender could advertise the lowest interest rate yet charge a higher APR, costing you more money in interest in the long term.
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The Worst Credit Card Mistakes You Should Stop Making
The Worst Credit Card Mistakes You Should Stop Making
There are several important benefits of using a credit card to shop. You can earn rewards, build your credit and take advantage of travel points and perks. But while shopping with a credit card can be convenient, there are also certain risks you need to be aware of.
If you pay a card late or don't pay your balance in full, you can incur fees and extra interest charges that make your purchases more expensive in the long run, especially considering today's rising interest rates, fueled by skyrocketing inflation. You could also wind up jeopardizing your credit score, which could make it harder to buy a house or get a loan.
So what are the biggest mistakes well-meaning people commonly make with their credit cards -- and what can you do to avoid financial pitfalls? I spoke with experts for their suggestions, and identified some of the most dangerous credit card behaviors. For more, learn how to get out of credit card debt and why now is the right time to pay off your credit cards.
Paying your credit card bill late
Missing a payment or making a late payment on a credit card is a major no-no. Colleen McCreary, a consumer financial advocate at Credit Karma, says this is the most common mistake people make with credit cards. Your payment history is a major factor of your credit rating and accounts for more than 30% of your overall score, McCreary said in an email.
A late payment is a one-way ticket to ruining your credit, and the ding on your report won't go away for seven years. Even worse, if your credit card bill remains unpaid, your creditor could sell your debt to a collection agency, which could tank your credit rating.
The best way to avoid late fees is to set a monthly reminder to pay your bill, and at least make the minimum payment. Most credit card companies will also let you set up monthly auto-payments, so you won't skip a beat. If you're worried you may not have enough each month to cover an autopayment, remember you can always set it to pay out the minimum, the full balance or a specified amount.
The credit bureau Experian notes that some credit card issuers may provide a short grace period for late payments, while others will mark your payment late as soon as you miss your due date.
If you do pay your credit card bill on time regularly and accidentally miss one payment, call your bank as soon as possible to see if it will offer one-time forgiveness, provided you pay in full at the time of your call. Your bank might refund your late fee and interest, but it isn't required to do anything.
While some credit card companies may mark your payment late after one day, those late payments are not reported to credit bureaus for 30 days, according to credit reporting company Equifax, If you act quickly to change your issuer's decision to mark your payment late, you could avoid damaging your credit score. If you're unable to pay your bill, you can also ask your issuer if it can create a payment plan for you.
Stop paying your credit card bill late
Sarah Tew/CNET
Maxing out your credit cards
After payment history, the second biggest factor in determining your credit score is the percentage of available credit that you are currently using. Called the "credit utilization ratio," this factor is calculated by dividing the amount you currently owe by your total credit limit, or your maximum borrowing potential.
Maintaining a high balance on your credit card compared to your total credit limit will increase your total percentage of credit used and hurt your credit score.
You usually want to keep your credit utilization ratio under 30% for a good credit score, though less is better. A good rule of thumb is to use 10% of your total credit limit and pay it off each month so you're not carrying a balance. For example, if your credit limit is $5,000, you wouldn't want to borrow more than $1,500 and ideally $500 or less.
If you find your credit card limit is too low -- for example, the amount you want to charge to your card exceeds the total you can charge on a given card -- you can always ask your credit card issuer for an increase.
Maxing out credit cards could also cost you big money if you can't pay off the total by the payment deadline. "The higher your outstanding balance (the amount of money you owe), the more interest you'll pay, which can make it even more difficult to climb out of debt," McCreary said.
Making only the minimum payment on your credit card
Your minimum payment is the lowest amount that your credit card issuer will allow you to pay toward your credit card bill for any given month -- for example, $50. The minimum monthly payment is determined by the balance on your credit card (what you owe at the end of the pay period) and your interest rate. It's generally calculated as either 2 to 4% of your balance, a flat fee or the higher amount between the two.
Making only minimum payments is one of the most common credit card mistakes, according to Katie Bossler, a quality assurance specialist at GreenPath financial wellness.
Although making minimum payments on time is still far better than paying late or ignoring your bill, paying only the minimum can cause interest to build, making it much more difficult to pay off your balance completely.
For example, if you have a $2,000 balance with a minimum payment of $50 on a credit card with an APR (annual percentage rate) of 14.55%, it will take 56 months (or almost five years) to pay off your debt, and you'll end up paying a total of $753 in interest. However, if you make a plan to pay the balance off in a year, your payments would be $180, and you'd only pay $161 in interest.
It only gets worse as the APR goes up -- at a relatively high but not unreasonable rate of 25%, a minimum payment of $50 would take 87 months (or a little more than seven years) to pay off a $2,000 debt, with a sizable $2,344 in interest payments. Meanwhile, upping the monthly payments to the same $180 would pay off your debt in 13 months, and cost only $281 in interest.
Here's an example of how making more than minimum payments can save you significant money in interest.
How minimum payments lead to higher interest
Credit card balance
Annual percentage rate
Monthly payment
Time needed to pay balance
Additional interest paid
$2,000
14.55%
$50
4.7 years
$753
$2,000
14.55%
$180
1 year
$161
$2,000
25%
$50
7.3 years
$2,344
$2,000
25%
$180
1.1 years
$281
The best way to avoid paying any interest at all on your credit cards is to pay off your full balance each month. If you can't do that, Bossler, the quality expert from GreenPath financial advisors, suggests pausing use of the credit card while you're paying it off, and paying more than the minimum to do so.
Taking out a cash advance on your credit card
Withdrawing a cash advance with a credit card is a big mistake. "It's the most expensive way to pay for things," Bossler said. Cash advances are a method of borrowing money from your credit line to put cash in your pocket "now."
Convenient as it may be, a cash advance uses an interest rate that is typically significantly higher than your standard APR. Most cards will also include a transaction fee of 3 to 5%. "This is not the way to go," Bossler said.
If you receive a "convenience check" in the mail from a credit card company, be careful. It could be a cash advance offer that's best tossed in the recycle bin. If you need some extra cash, it might be better to think about starting a side hustle or taking out a personal loan with a lower interest rate. Budgeting apps can also help track your spending, so you can pull back on expenses that can wait.
Chasing credit card rewards with abandon
If you're thinking of opening a new credit card account to get money back on your purchases, you can best manage rewards by considering your lifestyle. Heavy travelers should look for a card with frequent flyer rewards. If you spend a lot of money on groceries or drive your car often, look for cash back rewards for spending at gas stations and grocery stores.
However, you shouldn't make spending decisions based on receiving rewards. "Credit cards shouldn't be used as a strategy for buying things," Bossler said. Many cards will require a minimum amount of purchases for special rewards, or a welcome bonus to tempt you into spending more than you can afford.
Credit cards with lucrative rewards can also charge higher annual fees, for example, $100 or even $500 a year. If you're not spending enough to earn that annual cost back in rewards, you might consider a card with no annual fee.
Credit card rewards can be a powerful financial tool when used wisely, but you'll need to be careful to avoid running up your balance. Thomas Nitzsche, senior director of Media and Brand at MMI, says he often sees people making the mistake of using credit cards for rewards while ignoring the growing interest on their balance. If you're chasing rewards at the expense of your budget, consider coming up with a plan to pay your balance down instead.
Your credit score can drop when you cancel your credit cards.
Sarah Tew/CNET
Not paying off big purchases during a 0% APR period
Whether you just opened a 0% APR credit card -- which offers interest-free debt for a specific promotional period -- or a balance transfer card -- a credit card designed to accept debt from other cards -- make sure you read the fine print. Oftentimes, there's a fee to transfer your existing balance, commonly 3% of the balances transferred. Also, the introductory 0% rate only lasts for so long, typically between six and 18 months. That means you've got a limited time to pay off your balance before a higher APR kicks in. (When it does, your monthly interest gets a lot more expensive.)
To create a simple repayment plan, take the amount you owe and divide it by the number of months in your 0% APR promo period. Then pay that amount monthly to completely pay off your balance while you are borrowing without interest. For example, if you buy a $300 TV using a credit card with 0% APR for six months, making $50 monthly payments will eliminate your debt before the no-interest period expires.
Using a 0% intro APR credit card can be a good strategy to pay off your debt or finance a large purchase, but it can be risky, too. While disciplined borrowers can effectively roll balances into new accounts with 0% intro APR, Nitzche says that many people who transfer their credit card balances only make minimum payments, which can result in spiraling debt and damaged credit, leading to a point when they can no longer get approval for new accounts.
Canceling your credit cards
Even if you have paid down your balance on a credit card, there are two big reasons why you shouldn't cancel your account. Closing your account would affect your length of credit history and credit utilization ratio, two important components of your credit score. (Remember, your credit utilization ratio is the percentage of your total available credit lines across all cards you're using.)
If you close an account you're not using, your total available credit line shrinks, making your credit utilization ratio higher.
Canceling older credit cards will also shorten your credit history, leading to a significant drop in your credit score. If you do decide to cancel some of your credit cards, it's best to leave the oldest account open, as well as the one with the highest credit limit to maintain your credit utilization ratio and prevent any damage to your credit score.
It's important to note that with inactivity, credit card issuers may automatically close your account. To avoid this, Nitzche says that it's best to use each of your credit cards once in a while for small purchases.
Applying for too many credit cards
You may have heard this advice before: Don't apply for too many credit cards at once. Each time you apply for a new credit card, your credit score can drop slightly due to a "hard" credit check.
Hard credit checks require your consent and involve a full credit summary from a credit bureau. "Soft" credit checks occur when you view your credit report or a financial company requests a summary without your consent, and they don't affect your credit score. They're used for purposes such as preapproved credit card offers.
When you authorize lenders to pull your credit history, you'll see a "hard" inquiry on your credit report. According to credit score company MyFICO, a hard pull will lower your credit score by about 5 points. While it will stay on your report for two years, the deduction to your score will usually be eliminated within a year.
Too many hard pulls on your credit in a short amount of time -- for example, applying for five store credit cards in one weekend -- could affect your credit rating more, as multiple inquiries indicate higher risks of insolvency or bankruptcy. Experian suggests waiting at least six months between applying for new lines of credit to avoid lowering your credit score.
Applying for too many credit cards at once can drop your credit score.
Sarah Tew/CNET
Not checking your billing statements regularly
How often do you check your monthly billing statement? It can be an eye opener to see how much money you really charge your credit card, especially if it's routinely more than you bring home each month.
Spending $20 here and there may not seem like a huge amount, but it can add up quickly. Remember that increasing your credit utilization ratio (your percentage of credit used) will lower your credit score and high balances will cost you more in interest. Plus, how do you know how much you've charged if you aren't tracking your spending?
Tracking your credit card spending isn't the only reason to check your billing statement. You should thoroughly comb through your transactions to make sure there aren't any potentially fraudulent charges you didn't make. The sooner you discover you're a victim of identity fraud, the sooner you can contact your card issuer to dispute the charges and take the necessary steps to secure your credit card account.
For more tips on using credit cards wisely, learn six ways to get the most from your credit card and how to pick the right credit card.
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The Worst Credit Card Mistakes You Should Stop Making
The Worst Credit Card Mistakes You Should Stop Making
There are several important benefits of using a credit card to shop. You can earn rewards, build your credit and take advantage of travel points and perks. But while shopping with a credit card can be convenient, there are also certain risks you need to be aware of.
If you pay a card late or don't pay your balance in full, you can incur fees and extra interest charges that make your purchases more expensive in the long run, especially considering today's rising interest rates, fueled by skyrocketing inflation. You could also wind up jeopardizing your credit score, which could make it harder to buy a house or get a loan.
So what are the biggest mistakes well-meaning people commonly make with their credit cards -- and what can you do to avoid financial pitfalls? I spoke with experts for their suggestions, and identified some of the most dangerous credit card behaviors. For more, learn how to get out of credit card debt and why now is the right time to pay off your credit cards.
Paying your credit card bill late
Missing a payment or making a late payment on a credit card is a major no-no. Colleen McCreary, a consumer financial advocate at Credit Karma, says this is the most common mistake people make with credit cards. Your payment history is a major factor of your credit rating and accounts for more than 30% of your overall score, McCreary said in an email.
A late payment is a one-way ticket to ruining your credit, and the ding on your report won't go away for seven years. Even worse, if your credit card bill remains unpaid, your creditor could sell your debt to a collection agency, which could tank your credit rating.
The best way to avoid late fees is to set a monthly reminder to pay your bill, and at least make the minimum payment. Most credit card companies will also let you set up monthly auto-payments, so you won't skip a beat. If you're worried you may not have enough each month to cover an autopayment, remember you can always set it to pay out the minimum, the full balance or a specified amount.
The credit bureau Experian notes that some credit card issuers may provide a short grace period for late payments, while others will mark your payment late as soon as you miss your due date.
If you do pay your credit card bill on time regularly and accidentally miss one payment, call your bank as soon as possible to see if it will offer one-time forgiveness, provided you pay in full at the time of your call. Your bank might refund your late fee and interest, but it isn't required to do anything.
While some credit card companies may mark your payment late after one day, those late payments are not reported to credit bureaus for 30 days, according to credit reporting company Equifax, If you act quickly to change your issuer's decision to mark your payment late, you could avoid damaging your credit score. If you're unable to pay your bill, you can also ask your issuer if it can create a payment plan for you.
Stop paying your credit card bill late
Sarah Tew/CNET
Maxing out your credit cards
After payment history, the second biggest factor in determining your credit score is the percentage of available credit that you are currently using. Called the "credit utilization ratio," this factor is calculated by dividing the amount you currently owe by your total credit limit, or your maximum borrowing potential.
Maintaining a high balance on your credit card compared to your total credit limit will increase your total percentage of credit used and hurt your credit score.
You usually want to keep your credit utilization ratio under 30% for a good credit score, though less is better. A good rule of thumb is to use 10% of your total credit limit and pay it off each month so you're not carrying a balance. For example, if your credit limit is $5,000, you wouldn't want to borrow more than $1,500 and ideally $500 or less.
If you find your credit card limit is too low -- for example, the amount you want to charge to your card exceeds the total you can charge on a given card -- you can always ask your credit card issuer for an increase.
Maxing out credit cards could also cost you big money if you can't pay off the total by the payment deadline. "The higher your outstanding balance (the amount of money you owe), the more interest you'll pay, which can make it even more difficult to climb out of debt," McCreary said.
Making only the minimum payment on your credit card
Your minimum payment is the lowest amount that your credit card issuer will allow you to pay toward your credit card bill for any given month -- for example, $50. The minimum monthly payment is determined by the balance on your credit card (what you owe at the end of the pay period) and your interest rate. It's generally calculated as either 2 to 4% of your balance, a flat fee or the higher amount between the two.
Making only minimum payments is one of the most common credit card mistakes, according to Katie Bossler, a quality assurance specialist at GreenPath financial wellness.
Although making minimum payments on time is still far better than paying late or ignoring your bill, paying only the minimum can cause interest to build, making it much more difficult to pay off your balance completely.
For example, if you have a $2,000 balance with a minimum payment of $50 on a credit card with an APR (annual percentage rate) of 14.55%, it will take 56 months (or almost five years) to pay off your debt, and you'll end up paying a total of $753 in interest. However, if you make a plan to pay the balance off in a year, your payments would be $180, and you'd only pay $161 in interest.
It only gets worse as the APR goes up -- at a relatively high but not unreasonable rate of 25%, a minimum payment of $50 would take 87 months (or a little more than seven years) to pay off a $2,000 debt, with a sizable $2,344 in interest payments. Meanwhile, upping the monthly payments to the same $180 would pay off your debt in 13 months, and cost only $281 in interest.
Here's an example of how making more than minimum payments can save you significant money in interest.
How minimum payments lead to higher interest
Credit card balance
Annual percentage rate
Monthly payment
Time needed to pay balance
Additional interest paid
$2,000
14.55%
$50
4.7 years
$753
$2,000
14.55%
$180
1 year
$161
$2,000
25%
$50
7.3 years
$2,344
$2,000
25%
$180
1.1 years
$281
The best way to avoid paying any interest at all on your credit cards is to pay off your full balance each month. If you can't do that, Bossler, the quality expert from GreenPath financial advisors, suggests pausing use of the credit card while you're paying it off, and paying more than the minimum to do so.
Taking out a cash advance on your credit card
Withdrawing a cash advance with a credit card is a big mistake. "It's the most expensive way to pay for things," Bossler said. Cash advances are a method of borrowing money from your credit line to put cash in your pocket "now."
Convenient as it may be, a cash advance uses an interest rate that is typically significantly higher than your standard APR. Most cards will also include a transaction fee of 3 to 5%. "This is not the way to go," Bossler said.
If you receive a "convenience check" in the mail from a credit card company, be careful. It could be a cash advance offer that's best tossed in the recycle bin. If you need some extra cash, it might be better to think about starting a side hustle or taking out a personal loan with a lower interest rate. Budgeting apps can also help track your spending, so you can pull back on expenses that can wait.
Chasing credit card rewards with abandon
If you're thinking of opening a new credit card account to get money back on your purchases, you can best manage rewards by considering your lifestyle. Heavy travelers should look for a card with frequent flyer rewards. If you spend a lot of money on groceries or drive your car often, look for cash back rewards for spending at gas stations and grocery stores.
However, you shouldn't make spending decisions based on receiving rewards. "Credit cards shouldn't be used as a strategy for buying things," Bossler said. Many cards will require a minimum amount of purchases for special rewards, or a welcome bonus to tempt you into spending more than you can afford.
Credit cards with lucrative rewards can also charge higher annual fees, for example, $100 or even $500 a year. If you're not spending enough to earn that annual cost back in rewards, you might consider a card with no annual fee.
Credit card rewards can be a powerful financial tool when used wisely, but you'll need to be careful to avoid running up your balance. Thomas Nitzsche, senior director of Media and Brand at MMI, says he often sees people making the mistake of using credit cards for rewards while ignoring the growing interest on their balance. If you're chasing rewards at the expense of your budget, consider coming up with a plan to pay your balance down instead.
Your credit score can drop when you cancel your credit cards.
Sarah Tew/CNET
Not paying off big purchases during a 0% APR period
Whether you just opened a 0% APR credit card -- which offers interest-free debt for a specific promotional period -- or a balance transfer card -- a credit card designed to accept debt from other cards -- make sure you read the fine print. Oftentimes, there's a fee to transfer your existing balance, commonly 3% of the balances transferred. Also, the introductory 0% rate only lasts for so long, typically between six and 18 months. That means you've got a limited time to pay off your balance before a higher APR kicks in. (When it does, your monthly interest gets a lot more expensive.)
To create a simple repayment plan, take the amount you owe and divide it by the number of months in your 0% APR promo period. Then pay that amount monthly to completely pay off your balance while you are borrowing without interest. For example, if you buy a $300 TV using a credit card with 0% APR for six months, making $50 monthly payments will eliminate your debt before the no-interest period expires.
Using a 0% intro APR credit card can be a good strategy to pay off your debt or finance a large purchase, but it can be risky, too. While disciplined borrowers can effectively roll balances into new accounts with 0% intro APR, Nitzche says that many people who transfer their credit card balances only make minimum payments, which can result in spiraling debt and damaged credit, leading to a point when they can no longer get approval for new accounts.
Canceling your credit cards
Even if you have paid down your balance on a credit card, there are two big reasons why you shouldn't cancel your account. Closing your account would affect your length of credit history and credit utilization ratio, two important components of your credit score. (Remember, your credit utilization ratio is the percentage of your total available credit lines across all cards you're using.)
If you close an account you're not using, your total available credit line shrinks, making your credit utilization ratio higher.
Canceling older credit cards will also shorten your credit history, leading to a significant drop in your credit score. If you do decide to cancel some of your credit cards, it's best to leave the oldest account open, as well as the one with the highest credit limit to maintain your credit utilization ratio and prevent any damage to your credit score.
It's important to note that with inactivity, credit card issuers may automatically close your account. To avoid this, Nitzche says that it's best to use each of your credit cards once in a while for small purchases.
Applying for too many credit cards
You may have heard this advice before: Don't apply for too many credit cards at once. Each time you apply for a new credit card, your credit score can drop slightly due to a "hard" credit check.
Hard credit checks require your consent and involve a full credit summary from a credit bureau. "Soft" credit checks occur when you view your credit report or a financial company requests a summary without your consent, and they don't affect your credit score. They're used for purposes such as preapproved credit card offers.
When you authorize lenders to pull your credit history, you'll see a "hard" inquiry on your credit report. According to credit score company MyFICO, a hard pull will lower your credit score by about 5 points. While it will stay on your report for two years, the deduction to your score will usually be eliminated within a year.
Too many hard pulls on your credit in a short amount of time -- for example, applying for five store credit cards in one weekend -- could affect your credit rating more, as multiple inquiries indicate higher risks of insolvency or bankruptcy. Experian suggests waiting at least six months between applying for new lines of credit to avoid lowering your credit score.
Applying for too many credit cards at once can drop your credit score.
Sarah Tew/CNET
Not checking your billing statements regularly
How often do you check your monthly billing statement? It can be an eye opener to see how much money you really charge your credit card, especially if it's routinely more than you bring home each month.
Spending $20 here and there may not seem like a huge amount, but it can add up quickly. Remember that increasing your credit utilization ratio (your percentage of credit used) will lower your credit score and high balances will cost you more in interest. Plus, how do you know how much you've charged if you aren't tracking your spending?
Tracking your credit card spending isn't the only reason to check your billing statement. You should thoroughly comb through your transactions to make sure there aren't any potentially fraudulent charges you didn't make. The sooner you discover you're a victim of identity fraud, the sooner you can contact your card issuer to dispute the charges and take the necessary steps to secure your credit card account.
For more tips on using credit cards wisely, learn six ways to get the most from your credit card and how to pick the right credit card.
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Best Debt Consolidation Loans for August 2022
Best Debt Consolidation Loans for August 2022
If you have existing credit card, medical or other personal debt, keeping track of payments and getting hit with high-interest charges can be overwhelming. Debt consolidation allows you to combine your debt into a new, lower-interest loan. With the Federal Reserve expected to raise interest rates even higher this year, if you're considering a debt consolidation loan, now is the best time to lock in a low rate.
A debt consolidation loan combines all your high-interest debt into one personal loan, giving you a lump sum you can use to pay off credit cards, medical bills and other debt. By consolidating multiple payments into one fixed monthly payment, a consolidation loan means your debts will be easier to manage and you can simplify your repayment plan.
We've evaluated major debt consolidation loan providers and highlighted the best options below. We'll update this list regularly as terms change and new loan products are released. Note that all of the starting annual percentage rates, or APRs, that are listed are based on a high credit score of 800 or above.
Rates as of Aug. 3, 2022.
LightStream
APR: 5.73% (with AutoPay) to 19.99% (with AutoPay)
Loan amount: $5,000 to $100,000
Loan terms:24 to 84 months*
Time to receive funds:As early as same day (conditions apply)
Prequalification: No
Origination fee: No
Co-signer option: No, only joint applicants
Debt consolidation for student loans: No
LightStream is an online lender under Truist that offers some of the lowest rates for debt consolidation loans. Its low rates, high loan limits and long loan terms make it a great option for borrowers with excellent credit. Lightstream also eliminates fee pitfalls by not charging origination or prepayment fees -- but to lock in its lowest rates, you'll want to enroll in AutoPay, which will earn you a 0.5% discount.
A caveat is that LightStream doesn't offer prequalification, which often lets you view possible loan rates before the lender runs a hard credit check. To find out what rate you qualify for with LightStream, the lender will conduct a hard pull on your credit, which could cause a temporary dip in your credit score.
Rocket Loans
APR:7.727% to 29.99%
Loan amount: $2,000 to $45,000
Loan terms: 36- and 60-month terms
Time to receive funds:As early as same day
Prequalification:Yes
Origination fee: 1% to 6%
Co-signer option:No
Debt consolidation for student loans: No
Rocket Loans is a great option for those seeking same-day funding. It offers prequalification and flexible loan amounts and terms, and boasts zero prepayment penalties. However, it does charge an origination fee of 1% to 6% for each loan. Furthermore, in order to access the best rates, you'll need to sign up for AutoPay.
SoFi
APR: 6.99% to 22.23%
Loan amount: $5,000 to $100,000
Loan terms: 36 to 84 months
Time to receive funds: 1 business day after accepting loan
Prequalification: Yes
Origination fee: No
Co-signer option: Yes
Debt consolidation for student loans: Yes
Social Financing, or SoFi, offers debt consolidation at a low rate without origination, late or prepayment fees. It also offers a 0.25% autopay discount. It's notable for its special benefits, such as unemployment protection and free financial advising.
SoFi also offers great rates on private student loan debt consolidation (private student loan refinancing), at 3.49% for fixed-rate refinancing and 1.74% for variable-rate refinancing. It holds several promotions and guaranteed rate matches on student loan refinancing, including a $20 promotion on checking your rate on a SoFi student or personal loan refinance.
Happy Money
APR: 5.99% and 24.99%
Loan amount:$5,000 to $40,000
Loan terms:24 to 60 months
Time to receive funds: 2 to 5 business days
Prequalification:Yes
Origination fee: 0% to 5%
Co-signer option: No
Debt consolidation for student loans: No
The Payoff Loan by Happy Money is designed specifically for borrowers looking to pay off credit card debt. It focuses heavily on financial wellness, offering you access to tools to help track your credit score and build or rebuild your credit. Those with lower credit scores may also qualify, since Happy Money only requires a minimum credit score of 550 to take out a loan. On the downside, Happy Money does change an origination fee between 0% to 5% and its loans aren't offered in Massachusetts or Nevada.
Upstart
APR: 5.40% to 35.99%
Loan amount: $1,000 to $50,000
Loan terms: 36- and 60-month terms
Time to receive funds:1 business day after accepting loan
Prequalification: Yes
Origination fee: 0% to 8%
Co-signer option:No
Debt consolidation for student loans:No
Upstart describes itself as an artificial intelligence lending platform designed to offer higher approval rates and improve consumers' access to credit. While it does use your credit score to gauge eligibility, it also considers alternative factors, such as job history, to determine if you qualify. While you may be accepted even if you have insufficient credit history or no credit score, proof of a regular source of income is a requirement. It does not charge prepayment penalties.
However, Upstart does charge relatively high origination fees, as well as late payment fees and $10 for every requested paper copy of your loan agreement. West Virginia or Iowa residents are also not eligible for Upstart loans.
Best debt consolidation lenders, compared
LightStream
Rocket Loans
SoFi
Happy Money
Upstart
Best for
Excellent credit
Fast funding
No fees
Consolidating credit card debt
Limited credit
APR
5.73% to 19.99% (with Autopay)
7.727% to 29.99%
6.99% to 22.23%
5.99% to 24.99%
5.40% to 35.99%
Loan amount
$5,000 to $100,000
$2,000 to $45,000
$5,000 to $100,000
$5,000 to $40,000
$1,000 to $50,000
Term lengths
24 to 84 months*
36- and 60-month term
36 to 84 months
24 to 60 months
36- and 60-month terms
Time to receive funds
As early as same day (conditions apply)
As early as same day
1 business day after accepting loan
2 to 5 business days
1 business day after accepting loan
Prequalification
No
Yes
Yes
Yes
Yes
Origination fee
No
1% to 6%
No
0% to 5%
0% to 8%
Co-signer option
No, only joint applicants
No
Yes
No
No
Debt consolidation for student loans
No
No
Yes
No
No
FAQs
Will a debt consolidation loan save me money?
A debt consolidation loan may save you money. You may pay less interest if you're approved for a lower rate than your existing debt. For example, if you have $2,500 in total debt with a combined APR of 20% and a combined monthly payment of $125, you'll pay $566 in interest over about two years. But if you were to take out a debt consolidation loan with an 11% APR and a two-year repayment term, the new monthly payment would be $116.50, and you would save $329 in interest.
Keep in mind that access to lower rates is heavily dependent upon a high credit score.
How does student loan debt consolidation work?
Student loan debt consolidation is similar to other types of debt consolidation -- borrowers can combine multiple student loans into one for new terms and a potentially lower interest rate.
However, student loan debt consolidation differs depending on whether you have federal loans or private loans. If you have federal loans, consolidation can only occur through the Direct Loan program, for a new rate of the weighted average of all your loans, rounded to the nearest eighth.
You cannot consolidate private student loans. However, you can refinance your loans (both private and federal) into one brand-new loan. Keep in mind that debt consolidation is a loan combination, while refinancing is simply changing the terms on a debt obligation.
What is prequalification?
Many lenders offer the option to prequalify, which allows you to view your payment plan and see what your potential interest rates and monthly payments would look like. Prequalification requires a soft credit pull, allowing lenders to view a limited portion of your credit history. A soft credit pull will not impact your credit score.
What's an origination fee?
An origination fee is an upfront, one-time fee for processing your loan. It may also be called the administrative or processing fee.
What is a co-signer, and how does it differ from a joint applicant?
If you don't have a longstanding credit history, you may need someone with good or excellent credit to co-sign your loan. A co-signer takes on loan responsibility, serving as a guarantor, and is required to make loan payments if you're unable to. Keep in mind that your loan repayment history will affect your co-signer's credit score. With a joint-applicant loan, both applicants are held equally responsible for paying the loan back. A co-applicant has more rights and responsibilities than a co-signer.
Lenders reviewed:
Avant
BestEgg
Discover
Freedom Plus
LightStream
Marcus by Goldman Sachs
Payoff
PenFed
Peerform
Prosper
One Main Financial
Rocket Loans
SoFi
Upstart
More loan advice:
*Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice.
Payment example: Monthly payments for a $10,000 loan at 5.73% APR with a term of 3 years would result in 36 monthly payments of $303.00.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.
