#credit cards explained
Credit Card APR Explained
The single most important number related to your credit card account is the Annual Percentage Rate, which is the interest you pay on your accrued balance. High interest rates can be deceptively expensive. Here’s how you can calculate the true cost of your APR.
Calculating Your Actual Rate
Added Fees Add Up
This effective APR can be pushed even higher if your card charges you regular fees; a monthly charge of $10 per month, for example, becomes part of your accrued debt. You might think of $10 per month as $120 per year, but after interest you’ll actually owe $133.93 at the end of one year, and $297.34 at the end of two years. The longer you allow the interest to compound without paying it off, the more expensive it becomes.
The High Cost of Overspending
It is useful to know how much one dollar of expense is actually going to cost you. Most importantly, if you always charge more to your credit cards than you are capable of paying, your cost per dollar is effectively infinite: you’ll never catch up to this debt.
The High Cost of Past Debt
But consider what happens if you’re only treading water: let’s assume a $500 balance in January. You charge $50 one month, and $150 the next; meanwhile, you can afford to pay $100 a month on your bill. At the end of two years, your balance will be $780.78, even though you’ve paid off all of your new charges in that time — the cost of that initial $500 worth of goods is now 56% more than it was when you bought it. The solution is as simple as it is difficult: always charge less than you can afford to pay. If you pay $120 per month on that same bill, your balance will be $195.87 after two years, and you’ll only be nine more months away from paying off the bill entirely.
Spend Less Than You Can Afford