Credit

What Credit Really Costs
Charge It Today, and Pay for It The Rest of Your Life?

Have you ever wondered why it takes so long to pay down your credit card balance after a holiday splurge? Consider this:

• Say you have a $1,000 balance on a credit card that's charging 18 percent a year.
• When you receive the monthly bill on the credit card, the minimum due is $20.
• If you send in the minimum monthly payment, how much do you owe now?

If you guessed $980, guess again, because you forgot to add in the interest charge. Interest is a fee the credit card company charges you for loaning you their money. Interest is charged every month on the unpaid balance - not on the amount you send in. If a credit card company charges 18 percent as an annual rate of interest, it is charging you approximately 1.5 percent on your unpaid balance each month.

• So if you owe $1,000 at 1.5 percent for the month, the interest comes to $15.
• If you subtract 15 dollars from your $20 payment, you've only paid off five dollars of your $1,000 debt.
• After making the $20 payment, you still owe $995.

This example suggests two things: 1) Before you sign up for a credit card, shop around and find one with as low of an interest rate as possible. 2) Try not to charge more than you can pay off fully each month.

Fill in the blanks to calculate what you pay on your credit cards:

- Back to Top