Credit Card Costs
To understand how your credit charges add up so quickly, check out this scenario.
Let's say you charge $500 and then, perhaps realizing you spent too much, you put the card away and decide not to use it again until you've paid it off.
Your card has an 18% interest rate and a minimum monthly payment of either 4% of the monthly balance or $10, whichever is more.
This is what happens if you make the minimum payment every month:
|Option 1: Minimum Payment|
|Make the minimum monthly payment.|
|Monthly Payment||$20 (first month); subsequent payments decrease gradually to a minimum of $10|
|Total Interest Spent||$215.67|
|Total Amount Spent||$715.67|
|Time to Pay It Off||59 months (almost five years)|
Now see what happens if you pay off an even $50 every month instead:
|Option 2: Level Payment|
|Make a level payment of $50 each month.|
|Total Interest Spent||$45.82|
|Total Amount Spent||$545.82|
|Time to Pay It Off||11 months (just under one year)|
If you're only making minimum payments, it takes you more than five times as long (nearly five years!) to pay off that $500. Plus you're paying almost another $170 in interest.
Try It Out
Use the credit card calculator to try different situations. Think about whether that pair of shoes or those concert tickets are worth the extra money you'll be spending.