Let’s talk Credit Cards…
I’m doing some research and sharpening my knowledge on credit cards because, once upon a time I got into deeeeep trouble because of them so I just don’t use them any more, it’s been around 10 years, more or less! and so I, other than paying them out, have not really been on top of how it works. However I do make it my mission to learn all I can about the thing that most people have the most resistance in letting go! Most people swear by credit cards and love playing, trying to win at the credit card game. But how does it all work? And what does that have to do with compound interest? Let’s see…
*Compound Interest – it’s the interest on a loan, any type of loan, even credit cards, calculated daily on the initial loan amount and the accumulated interest from previous periods.
So, I’ve been digging and what I found is, to say the least, sneaky, no, I’m not taking sides here, just informing you that, if you are playing the game and winning it’s a lot of work, so, congratulations on being on top of it! Seriously, I get dizzy with all the strategies and hidden rules that, if you are not careful, will suck you to the bone and then some!
On any loan, and yes a credit card is a loan, you are technically borrowing money from the credit card company that you promised to pay by the due date accorded, there’s an Interest Rate that you are charged by the bank or credit card company. This is called APR – Annual Percentage Rate, which, as the name implies is calculated annually and on the amount of the loan. However, it compounds daily, which as we’ve seen is calculated daily and not only on top of the loan balance but also on top of the interest accumulated. Let me explain:
“You have a credit card balance of $1000 at an APR (Annual Percentage Rate) of 18% and a fixed minimum payment of 3% (so you pay $30 a month)” – If you only make minimum Fixed payments (the same $30 every single month) on it until you pay it off it will take you about 47 months to pay off (that’s 3.9 years!!) and your Interest rate will come to 28% (it’s 18% on top of 18%, on top of… you get the picture)and you’ll have paid $396,00 interest. So, you borrowed $1000, it took you 3.9 years to pay it off and it cost you $396 in Interest”
However, if for the same card with the same balance you pay only the minimum required by the credit card company, let’s say it’s 3% (the amount that is actually written on your credit card statement see below), it will take you 93 months to pay off the balance! That’s 7.75 years, because you can see below the payment will decrease, because you owe less and you are paying more interest than actual balance! When you end paying that credit card bill you will have paid $980 in interest, you have been paying interest on the interest and that my friend is called “compound “.
| 1 | $30.00 | $15.00 | $15.00 | $985.00 |
| 2 | $29.55 | $14.77 | $14.78 | $970.23 |
| 3 | $29.11 | $14.55 | $14.56 | $955.67 |
The take away is to pay off the balance on your credit card every single month! and be aware that if you don’t pay the full amount of your balance in the grace period offered by the bank they will charge you interest from day one, not from the day you should’ve paid it on. Let’s say you have 21 days grace period where you pay no interest if you pay your balance in full, if by day 22 you haven’t paid it you’ll be charged interest from day 1 not day 22!!
My head is spinning so I’m going to leave it here! The take aways are, always pay your credit card balance infill during the grace period so you don’t have any interest or late fees. If you are like me and can’t trust yourself with one, don’t use it!
S – The Sparkling Budgeteer
