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The Cost Of Using Credit CardsArticles > Using Credit Cards > The Cost Of Using Credit Cards |
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The Cost Of Using Credit CardsHow many people actually know how much their credit cards are really costing them? I guarantee that if more people understood how credit cards work and knew the dollar amount that it costs to carry a balance, there would be a lot less people using them on a daily basis for frivolous purchases.Do you know your current interest rate? If you have paid late on any of your credit cards you may pay a higher price than you previously thought. Credit card companies can get information from the credit bureaus that tell them if you are paying your bills on time or not. If you have made a late payment, look at your credit card statement to see the amount of interest your credit card is charging you. It could be as high as 29.99% or more in some areas. You will need to know the interest charged on your credit card before you can know the true cost of what your credit card is costing you. Most people just look at the minimum payment calculated by the credit card company at around 2% of your balance . A small price to pay monthly to be able to buy a big ticket item now, right? Wrong! Let’s Do the math on a $3940.22 purchase. This could be in one big purchase or many small purchases from a frivolous day of shopping. Let’s assume that we have a Nominal APR of 18.74% as this is a very common number these days. The periodic rate is .05134%. This card also charges interest from the first day the purchase was made. There are 29 days in this months billing cycle. Here’s the formula for figuring interest charges: Periodic Rate x Number of Days in Billing Period x Your Outstanding Balance = Interest Charges Our example looks like this .05134 x 29 x 3940.22 = $58.66 interest applied toward your balance. Already our 3940.22 dollars spent on a frivolous day of shopping has cost us an additional $58.66. We will be paying for this day for a long time to come if we can’t pay of the balance quickly within our current budget. We now have to pay back $3998.88 to our creditor. With a minimum payment of around $80, only $22 will come off of the balance this month. Now it starts all over again the next month except there are 31 days in this billing cycle. The same formula: .05134 x 31 x 3976.88 = $63.29 interest applied toward your balance. Can you see how expensive credit cards can be when used without knowing the true cost? If you only pay the minimum payment, it could take you 30 years to pay off this one day of shopping. Use the formula shown to plug in your own numbers to see what your interest charges are. You will find all of the information needed for this example located on your credit card statement. Once you have worked it a few times, it becomes easy to figure. Go ahead and bookmark this page now for future reference. |
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