by Jeff
9. October 2011 02:18
Planning on booking that vacation of yours for the summer or maybe shopping early for your holiday present using your credit card especially because your credit limit just got increased recently, perfect. It would of course pay to understand the liabilities you get through credit card purchases especially knowing credit card interest rates so you won’t be shocked clueless when you get your billing statement at the end of the month or your billing cycle. Interest is what gets added on top of your principal purchases and more often range between 15-20% annually.
To help us understand better how interest rates affect your bill, here’s a sample computation. Take for example a purchase you made for $300 and you have an annual interest rate of 15% and a minimum payment to be made to you debt of 3%. Now remembering all those figures, for the interest rate of 15% annually (300*.15/12) gives us $3.75 and a minimum payment of (300*.03) of $9 per cut off. This translates to the point that for a purchase you make of $300 a minimum payment of $9 for the next 12 months would satisfy the debt however only $5.25 actually goes toward the principal debt because $3.75 goes toward interest rates. So doing some math on the formula with a payment of $9 for a $300 debt, you’d be able to pay that within roughly 30 years (which is of course a bit too long) nevertheless for the sake of example is correct. But with the actual payment of $5.25 per payment it would actually take you roughly 57 years to completely pay off the principal debt which is not only impractical but absurd.
Basically, this only goes to show that interest rates strongly affect the amount you have to pay and deal with especially with bigger purchases. It would take an average individual to pay his debt around 2-3 years or even longer simply because not enough emphasis and understanding is shown to interest rates. Sure it’s just a fraction added toward the money I borrowed for making the purchase wherein in reality it’s a lot more to that. A good rule of thumb is to pay more than the minimum payment required. That way you could satisfy the interest rate requirement and at the same time cut down on the principal debt amount. This would be beneficial for you in the long run making it possible to eliminate the debt in a shorter span of time.
The next time you swipe your card through for a purchase knowing your credit card interest rates would go the extra mile giving you a heads up on the bill you should expect. As the saying goes, prevention is far better than the cure and avoiding debt early on would save you the hassles of going through debt management in the later part.