Get a better understanding of how credit cards work, including how to manage credit cards, in this free lesson.

Payments and finance charges

Many people get credit cards to pay for goods and services. If you pay the full amount you owe when your credit card bill arrives, you can avoid paying extra fees. However, if you only make the minimum payment, the interest or finance charges (the amount you pay for using credit) can build up significantly. The more money you owe on your credit card, the higher the finance charges will be.

Let's imagine that you bought a fancy TV set that costs $1,000 on a credit card with a 15 percent interest rate. Depending on how long you take to pay off your credit card balance, you could spend hundreds of dollars in interest.

Monthly PaymentTime to Pay OffInterest PaidTotal Cost of Loan
$ 100.0011 months$ 74.91$ 1074.91
$ 50.001 year, 11 months$ 157.91$ 1157.91
$ 30.003 years, 7 months$ 301.66$ 1301.66
$ 20.006 years, 7 months$ 579.11$ 1579.11

To avoid getting deep into credit card debt, do one or more of the following:

  • Pay off the cards with the highest finance charges first.
  • Pay more than the minimum payment required each month, if possible.
  • Use cash to make purchases, if possible. Use a credit card only in emergencies or when necessary, such as for car rental.
  • If you use a credit card, pay the full amount each month instead of letting finance charges accrue.
  • Replace higher-rate credit cards with lower-rate ones. Be sure to read and evaluate credit card offers carefully to make sure you are getting the best deal. Often, low introductory offers allow you time to pay off your credit card balances. However, make sure that a 0 percent interest rate doesn't climb to 19 percent or higher in a few months.

The interest rate can make a significant difference in how much you pay for an item. If you purchased a $1,000 item and paid $30 each month at various interest rates, here's what could happen.

Monthly PaymentInterest RateTime to Pay OffInterest PaidTotal Cost of Loan
$ 30.0020%4 years, 1 month$ 471.80$ 1471.80
$ 30.0015%3 years, 7 months$ 301.66$ 1301.66
$ 30.0010%3 years, 3 months$ 176.40$ 1176.40
$ 30.005%3 years$ 78.87$ 1078.87