Get a better understanding of how credit cards work, including how to manage credit cards, in this free lesson.
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 $1,000 on a credit card with a 15 percent interest rate. Depending on how long you take to pay off your credit card balance, you could spend hundreds of dollars in interest.
|Monthly Payment||Time to Pay Off||Interest Paid||Total Cost of Loan|
|$ 100.00||11 months||$ 74.91||$ 1074.91|
|$ 50.00||1 year, 11 months||$ 157.91||$ 1157.91|
|$ 30.00||3 years, 7 months||$ 301.66||$ 1301.66|
|$ 20.00||6 years, 7 months||$ 579.11||$ 1579.11|
To avoid getting deep into credit card debt, do one or more of the following:
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 $30 each month at various interest rates, here's what could happen.
|Monthly Payment||Interest Rate||Time to Pay Off||Interest Paid||Total Cost of Loan|
|$ 30.00||20%||4 years, 1 month||$ 471.80||$ 1471.80|
|$ 30.00||15%||3 years, 7 months||$ 301.66||$ 1301.66|
|$ 30.00||10%||3 years, 3 months||$ 176.40||$ 1176.40|
|$ 30.00||5%||3 years||$ 78.87||$ 1078.87|