Many benefits come from owning and using credit cards. However, those who spend more than they can pay back in a month will pay. Carrying a balance on your credit card will end up costing you more in interest than the things you initially purchased. Here is what you should know.
WHAT’S CREDIT CARD INTEREST?
Interest is the fee charged by the credit card company for borrowing money. It’s charged anytime you carry a balance past the due date.
HOW IS INTEREST CALCULATED?
Most people do not know that interest is charged daily, not monthly or yearly. You can determine your daily interest charge by dividing your interest rate by 365 and then multiplying it by your credit card balance. For example, if your interest rate is 19.99%, the daily interest rate will be 0.054%. If you owe $1,000, this translates to roughly $0.55 a day.
Furthermore, some banks compound interest. Compound interest involves the daily interest being added to the next day’s balance, effectively charging interest on the interest already charged.
Interest rates only affect you if you carry a balance on your card. Unfortunately, many people cannot pay their balance in full and instead make only the minimum payment noted on their credit card statement.
Minimum payments help keep your credit card and credit rating in good standing but cost you a lot more than the price you purchased. Many banks calculate the amount based on a fixed amount or a percentage of the balance due.
However, making only the minimum payments will end up costing you much more and take much longer to pay off. Taking the above example of a $1,000 debt on a card with a 19.99% interest rate and supposing your credit card agreement calculates minimum monthly payments like $10 or 3% of your balance. The minimum monthly payment, in this case, will be $30 a month. If you pay only this every month and don’t spend anything else on your card, it will take you almost 11 years to pay it off. In which time you’ll have also paid almost another $1,000 in interest.
A licensed insolvency trustee from Fox-Miles & Associates can help you take control of your finances with our reliable and professional credit counselling service. Our offices help people from all over the Edmonton area, including Spruce Grove, Sherwood Park and Hinton. Contact us today to set up an appointment and get your finances back on track.
