If it seems like everyone has a credit card these days, it’s because most people do. Sixty-seven percent of Americans have at least one, according to Experian’s 2019 Consumer Credit Review.
Choosing to open a credit card account may seem like a no-brainer. After all, credit cards are a convenient way to pay for the things you need. And they’re safer and more secure than carrying around a stack of cash. Plus, if you don’t have enough money to cover a purchase, you can use your card to buy it, right?
Well, technically yes. But when you continue to use your credit card to buy things you can’t afford to pay for right away, they could end up costing you a whole lot more than you bargained for down the road because of the added interest charges.
When you don’t pay for all the purchases you make each month, you’re essentially getting a loan from the card issuer to cover what you don’t pay. The amount that’s left unpaid is called a balance, and the credit card company gets to charge you interest on that amount. It’s the cost you pay for borrowing money.
Banks aren’t handing out credit cards out of the goodness of their hearts, after all. They’re doing it to make money. They know that not everyone who gets a credit card will pay their bill in full each month. In fact, they’re counting on it because one of the ways they make money is by charging interest on unpaid balances.
The more people who don’t pay their entire bill each month, the more interest banks charge and the more money they make.
At first glance, a few extra dollars in interest may not seem like a big deal. After all, you can always pay for it next month or the month after that, right?
Well, here’s the problem.
What may start as just a few extra dollars in interest charges can quickly snowball, significantly increasing the amount you owe. Here’s why.
First, credit card interest rates are high, so you’re unlikely to pay just a few dollars in interest. In fact, the average Annual Percentage Rate on credit card accounts that were charged interest was nearly 16% in May 2020. And that’s just the average. Many cards have rates that are a lot higher.
[Quoted Text]: APR stands for annual percentage rate, and it’s the annual interest rate you’ll pay if you carry a balance on your credit card.
So, let’s say you use your credit card at your favorite electronics store to buy a new flat screen TV that’s on sale for $1,500. It’s too good of a deal to pass up, right?
Not so fast.
If you don’t pay your balance when you get your credit card bill, instead of costing you $1,500, that TV will cost you $1,500 plus interest charges. If you make only the minimum payments until the balance is paid off, that $1,500 TV could cost you as much as $2,900 on a card with an APR of 16% . And it’ll cost even more if your card has a higher interest rate.
But that’s only part of the problem.
If you make your payment late or don’t make a payment at all, the credit card company will not only charge you a late fee, they may also charge you interest on the interest that was already added to your account. Plus they may start charging a higher interest rate because you missed a payment.
To make matters worse, when you have a balance on your card and you make a payment, the payment is applied to the interest you owe first. Then, anything that’s left over gets applied to your original balance. That means you might not even be paying for the stuff you bought. You might only be paying the interest charges.
If you continue to use your credit card to make additional purchases, the cost gets added to your balance. The credit card company charges more interest, and the pattern continues.
When you have credit card debt piling up, and you’re just trying to keep up with the interest payments, it can be difficult to achieve any of your other financial goals. That’s why it’s important to reduce the amount of interest you pay as much as possible.
The fastest way to do that is by paying more than the minimum due each month . Even just a few extra dollars can have a significant impact on the amount you owe. And the sooner you pay off your debt, the sooner you’ll be able to achieve your other financial goals.
To find out how much you can save on interest charges, register with Woven today and check out our debt management calculator.
To learn more about how Woven can help you minimize the amount of credit card interest you pay and get more tips for reducing your debt, join our Private Facebook Group.