It is important to understand what interest is on credit cards, or any type of loan.
I received an email the other day from a previous credit card company. They were sending an update regarding interest rate changes. I was shocked when I looked at the numbers. I haven’t paid interest on a credit card in so long. I would say I out of the loop on credit card interest.
What is an interest rate?
Interest is a way credit card issuers generate revenue. This is the fee they charge to essentially lend your money for purchases.
The current interest rate with this one company in particular is 21.74% APR for purchases and 29.99% APR for Cash advances.
According to Lending Tree the average APR as of December 2023 was 24.59%. This is just an average as the rate is dependent on the persons credit score as well as the type of card.
Why are these numbers so important?
When the bill comes, let’s say you only pay the minimum balance due, you will be charged interest on the remaining balance. Month of over month that adds up to a whole lot of money.
Here is an example I found on NerdWallet:
Let’s go through an example to show how interest is calculated. Say you have a credit card balance of $2,000 and an interest rate of 18%. You make two payments before the due date — one payment of $500 on day 11 of accruing interest and another of $500 on day 21. In this case, you’ll incur $22.05 in interest.
Methodology
In case you want to run the numbers on our interest calculation, here’s the math:
Daily interest = 18% / 365 = 0.049%
Average daily balance = [(2,000 x 10) + (1,500 x 10) + (1,000 x 10)] / 30 = $1,500
Monthly interest = $1,500 x 0.049% x 30 = $22.05
You may be thinking, $22.05 is not bad. Take that amount month over month and keep adding purchases to your average daily balance and that number will turn into hundreds or thousands of dollars quickly.
How do i get away from using credit cards?
Stop using them.
Create your budget each month.
Tell every dollar were to go, instead of leaving it to chance.
Cut up credit cards and keep pay them off. Include credit card repayment in your budget.
Use cash instead.
Can you help me with my budget?
Absolutely! Schedule your free consultation call HERE and we will discuss your financial goals, where you are now and where you want to go.