5 smart habits to keep you out of credit card debt

More Americans are falling behind on their credit card bills.

According to the Federal Reserve Bank of New York, people under 30, as well as lower-income families, are the most likely to be maxed out. And that means they're at greater risk of missing a payment, reports NPR’s Scott Horsley.

But there are ways to keep your credit card bills under control, says John Kiernan, managing editor at the personal finance website WalletHub.

He shares five tips on how to stay out of debt -- including what to do if you miss a payment or are stuck paying interest and late fees.

Make sure you understand how interest works

Interest compounds fast -- and how it’s calculated is often misunderstood.

Let’s say you open a credit card with a 27% APR, or annual percentage rate. That’s how much you’ll pay in interest on purchases – if you end up having to pay interest.

You buy something on January 1 for $100, then you don't make any payments on it for a year. You might think that on December 31, you'll owe $127.

But that’s not the case. Interest and late fees start adding to your credit card balance the day you miss a payment. And you’ll have to pay interest on interest and fees.

Assuming $30 in late fees a month, plus interest and compounding interest, your bill would almost double by the end of April!

To avoid costly interest charges, pay your full statement balance every month at the due date, says Kiernan. Otherwise, they can get “very, very expensive.”

Don’t lose your grace period (if you do, try to get it back)

There’s another reason to pay your monthly statement balance in full, says Kiernan. You don’t want to lose your grace period. It’s an interest-free period that many credit card companies offer between the time you make a purchase and your payment due date.

If you don’t pay the full statement balance one time, that grace period goes away -- and you’ll start accruing interest every day not just on that purchase, but on everything else you buy going forward.

The good news is you can regain the grace period. So if you lose it, call the customer service number on the back of your card. Talk to a representative and ask what you can do. They might say you need to settle up in full or pay two consecutive statement balances.

If you can’t pay the full balance, make the minimum payment

The minimum payment is “the smallest amount you're required to pay each month to keep your account in good standing,” says Kiernan. That can be a fixed dollar amount, maybe $25, or a small percentage, say, 2% of the total you owe.

If you don't make your monthly minimum payment, that will hurt your credit score, he warns. You will also be charged interest, and probably late fees as well.

If you miss a minimum payment, call your credit card company. They will often waive fees and interest if it's your first time. “They're not going to do it every month, but if you've been a good customer, they may cut you a break,” says Kiernan.

You can also set up automatic payments so you won’t miss a payment by mistake.

If you’re in credit card debt, consider a balance transfer

To avoid paying the additional interest on your credit card debt, try a maneuver called a balance transfer. That's when you roll over your debt to another credit card with a 0% interest rate for some period of time -- it could be a year, a year and a half -- so that you're just paying the amount you already owe.

“If you do it right, you can take the current balance you can't pay and reduce the interest rate to zero so you're only paying the principal. And you can pay that off much quicker at much less of an expense,” says Kiernan.

These cards will usually charge a one-time balance transfer fee of 3 to 5% of your total balance. But this is still a good deal if you pay off the debt within the 0% interest period.

One thing to note about these cards, says Kiernan: “A lot of people think that once you get a 0% card, you don't have to make any payments on it for the whole 0% period. But you still have to pay at least the minimum amount due on that.”

Create a strategy to pay off your credit card debt

If you find yourself routinely missing credit card payments, come up with a plan to pay down your debt, says financial coach Yanely Espinal, host of the Marketplace podcast Financially Inclined.

There are free online calculators that can help you do that. Let’s say you have a $500 balance on a 0% card. If you make monthly payments of $50, it will take you ten months to pay off your debt.

Make sure you factor those payments into your monthly budget. Take a look at your savings, assets and income, as well as your debt, fixed expenses like rent, and other fluctuating monthly expenses, and figure out how and when you can pay that credit card bill off.

Espinal says she was struggling with credit card debt in 2014, and having a plan to pay it off gave her a way forward. “I knew that by October 2015, I was going to make my last payment. I was going to be debt-free.”

This story was written by Malaka Gharib. It was edited by Marielle Segarra and Clare Marie Schneider. The visual editor is Beck Harlan.

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