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.
